Small-firm finance set for a boost

SUPPORT is gathering pace for a novel pounds 2bn privately run fund, as the Government looks for ways to bolster manufacturing industry without dipping directly into its own pocket.

According to Peter Hanratty, one of the creators of the Enterprise Fund, 'at least one clearing bank has expressed an interest in working with us'. The Treasury, which will be asked to guarantee the fund, is studying the idea and has indicated it would not have any impact on the PSBR.

Mr Hanratty and his colleague Mark Gheerbrant, who work for the Industrial Bank of Japan but are operating in a personal capacity, say the fund could create 150,000 jobs in five years. It would provide long- term fixed-rate finance for small and medium-sized firms.

The money would be raised with 10-year Eurobonds, sold mainly to foreign investors, and lent to clients identified by banks. About pounds 2bn would be raised over five years, with the first year's issue amounting to pounds 300m. Banks would take 25 per cent of the risk and the fund would bear the rest. Its own credit committee would screen proposals and make sure the money was used for 'wealth creating activities', although the definition of this remains vague. The only sector positively debarred is property.

Fixed-rate finance over seven years for amounts between pounds 100,000 and pounds 1m would be available at about 10 per cent a year, to companies with sales between pounds 3m and pounds 50m. It would help companies that do not want to go to venture capitalists but are too big to gain backing from the Government's loan guarantee scheme. The interest cost would include a premium to cover likely defaults. However, if the fund was unable to cover a bond when repayment was due, the government would be asked to step in.

Mr Hanratty hopes the fund will change management philosophy: 'If we offer it, people might start to plan for the long term.' Its nearest equivalent is Germany's Kreditanstanstalt fur Wiederaufbau, the post-war reconstruction fund that is now an important source of finance for smaller companies. But KfW would dwarf the Enterprise Fund: last year it lent pounds 5bn.

Mr Hanratty is confident his fund will take off. It has been examined by the DTI, the CBI, academics and banks, and nobody, he says, 'has yet turned round and said it's rubbish'.