Nobody could describe the equity gap experienced by small firms as a new or inadequately investigated subject. The description of it in the Macmillan Report of 1931 still has a contemporary ring sixty-five years later. Moreover, the contention of the Radcliffe Committee in 1959—that the equity gap had been largely closed by the establishment of the Industrial and Commercial Finance Corporation in 1945—would now be regarded as highly optimistic, notwithstanding the important contribution made by 3i and the venture capital industry as a whole. It was certainly the view of the Bolton Committee in 1971 that the ‘Macmillan Gap’ still existed, and academic research and other investigations since have confirmed this view.
During the last few years, however, a number of developments have brought the subject of the equity gap increasingly to the fore. One has been simply the greatly increased focus on the economic contribution of small firms and the consequent importance of ensuring that their financial needs are adequately met. The very serious difficulties that emerged in the relationship between the clearing banks and their small business customers in the early 1990s prompted Eddie George, the Governor of the Bank of England, to take a direct initiative in the area of the financing of small firms. Relationships are now on a more constructive footing, with a strong emphasis on the importance of ensuring that finance is appropriate for the use that it is put to—whether it be bank debt, asset-based finance, or equity.
While much of the recent discussion about the financing of small firms has centered on debt finance and the role of the clearing banks, there has also been general acceptance that many smaller businesses in the United Kingdom continue to be under-capitalised. There have been a number of recent public policy initiatives aimed at ameliorating this: for example, the Enterprise Investment Scheme and Venture Capital Trusts. None the less, recent concentration on the particular needs of technology-based small firms has reinforced the point that small firms that are perceived to be in the high risk category—whether this perception is accurate or not—do not find it easy to raise risk capital, even in relatively small amounts. The Bank of England’s report, ‘The financing of Technology-based Small Firms’