Government investment fund largely backed “zombie businesses”

According to documents seen by the Financial Times, this has resulted in a “significant tail of dormant companies”. The venture capital fund, called the Future Fund, was a £1.1bn portfolio set up by Tory leadership candidate Rishi Sunak when he was the chancellor and was managed by the state-owned British Business Bank. 

It invested in 1,190 mainly early-stage companies at the height of the Covid pandemic. Minutes of a British Business Bank audit committee in June 2021 - seen by the Financial Times - show a non-executive director saying “most of the companies in the [Future Fund] portfolio had…limited chance of growth to a sufficient scale for success”, and would become “zombie businesses”. 

Minutes from the meeting in February 2022, meanwhile, include a warning that the portfolio was “likely” to have “a significant tail of dormant companies and it would be helpful if this could be signalled in advance to manage expectations”. 

In addition to this, the minutes reveal the British Business Bank initially assumed in March 2021 that the probability of default by the companies that received Future Fund convertible debt from the government was 54%. 

The scheme was aimed at not-yet-profitable businesses that were not served by other government Covid support programmes, with Sunak saying it would help “to power the growth and innovation we will need as we recover from this crisis”. 

However, the audit committee minutes from June 2021 suggest the open process for Future Fund applications created “natural adverse selection”, attracting companies that wanted “either to accumulate as much funding as possible because prospects were excellent, or because funding could not be obtained through other investment channels”.

Responding to a request for comment from the Financial Times, the British Business Bank said: “Due to the early-stage nature of venture capital investments, write-offs are relatively high, with financial returns driven by a number of high-performing outlier companies.” 

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