Private capital-raising initiative under fire: Government-funded bodies deride competitor

GOVERNMENT-sponsored economic development agencies have attacked a private sector plan by a group of prominent businessmen to create a network of 'business angels'.

The businessmen plan to match 'business angels' - wealthy individuals seeking to invest and participate in small businesses - with small and medium-size enterprises (SMEs) trying to raise capital.

The businessmen include Peter Benton, a former director of BT and the merchant bank Singer & Friedlander, and John List, formerly a director of 3i. Through their company, the Enterprise Support Group, they will offer a database of investment opportunities to business angels.

However, government- funded economic development agencies are warning that the proposed venture will find it difficult to survive in what they say is an unprofitable market. ESG will also establish a national network of business advisers, who will offer business planning advice to any SME seeking to register on its database.

The plan includes vetting procedures to ensure that all investment proposals included in the database accurately reflect the SME's circumstances.

Mr Benton believes that many SMEs will be anxious to attract equity finance to reduce reliance on banks. Pointing to government figures, Mr Benton said: 'Sixty per cent of UK SME debt finance is in the form of bank overdrafts. In Germany, the equivalent figure is 20 per cent.'

Mr Benton added: 'If these firms are to grow and survive the next recession they will need strengthened balance sheets. We want to offer a database of good sound businesses that will be made sounder by the introduction of equity finance instead of volatile bank finance.'

ESG will itself be run as a small business. It will receive a pounds 250,000 investment from Mr Benton and his colleagues. It will earn revenue by charging SMEs a fee to register on the database and by running courses to train consultants. Access to the database will be free to the angels.

Mr Benton claims that market research shows there are about 10,000 potential investors. As the scheme becomes more widely publicised, the number could rise to 50,000. The available funds could be up to pounds 2bn. ESG believes it can attract up to 16,000 SME registrations. The database will be accessible from anywhere in the country, or overseas.

Mr Benton said: 'Existing agencies, mainly development agencies, couldn't possibly achieve the scale ESG will develop.

'They have achieved welcome - but modest - success. We are trying to transform the industry. We need to go from 100 deals a year in the industry to several thousand a year.'

However, some government-sponsored economic development agencies have expressed doubts.

TechInvest, a government- sponsored business angels network based in Cheshire, was launched in February 1993. In its first 10 months of operations, it completed 12 deals that raised pounds 631,000. A spokeswoman said: 'I cannot see the scope for ESG to charge enough fees. Trying to fill the equity gap through business angels is not commercially viable for the private sector to do . . .'

Fiona Conoley, who runs the business angel unit at Linc, the Local Investment Networking Company, which is also government-funded, said economic development agencies needed to spend a lot of money marketing themselves before they could make an impact.

Commenting on ESG's pounds 250,000 capitalisation, Ms Conoley said: 'The Government has spent millions to market their enterprise initiative. If ESG want to market themselves nationwide, they will need much more money.

'But since the industry is not all that profitable, it is difficult for them to invest on that scale.'

She added: 'ESG's proposals are very passive in what they intend to do for investors. They will find investors reluctant to sit at a PC and look through a large database. Investors want someone to sift the information for them.'

Lucius Cary, managing director of Venture Capital Reports, a small business angels information service in Henley, said: 'We started in 1978 and do between 10 and 20 deals a year. We've seen lots of people aspiring to start national networks in the past, and it just doesn't work.'

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