In the spending review, the Government announced a Levelling Up Fund. ‘£4.8 billion will now be invested in local projects, such as regeneration and transport, ensuring the government provides the same support to communities across the UK as we build back better from Covid’. These investments in ‘town centre and high street regeneration, local transport, cultural and heritage projects’ will be welcome. But ultimately, they are infrastructure projects which will be done to communities.

So while infrastructure is good, it is, at best, half the picture. Lasting, deep, sustainable levelling up can only come from releasing the entrepreneurship and creativity of literally hundreds of thousands of small, place-based businesses. These businesses are the root system of community and the engine of prosperity. They offer dignified work, provide local employment, pay their taxes, innovate and meet the needs of their local community. The artisan producers, the makers and the fixers, the caterers, gardeners and hairdressers, the creators and the retailers and the experts. Doing it for themselves and each other, rather than having it done to them, or doing it for someone else (who is usually in London).

But in the areas that need ‘levelling up’, our great British nation of small business proprietors need a jump start. Since deindustrialisation and the closure of their historic employers, many communities have become hollowed out. The capacity for self-help has been eroded, even cauterised. It has left them with little option but to take what crumbs they are offered by big business or big government – whether that be in the call centre, the gig economy or the cookie-cuttered fast food joint… or contracting on a temporary infrastructure project.

So – what is stopping renewal, the recreation of this root system of community, these small place-based independent businesses? Any capital markets textbook will tell you that enterprise starts with the support of family and friends – who lend you the cash to buy the kit, or give you the confidence to sign the lease knowing that if you get into trouble they’ll help you out. To introduce you to their friend who’s an accountant and can help you sort out your basic admin and get legally set up. To provide the financial safety net and network of support that gets you going. Once up and running, most small businesses don’t need further equity capital. But if they want to grow, there is a well trodden path through venture capital and private equity and then onto the public markets. 

But what do you do if your friends and family lack the capacity to offer this support – both through financial poverty and also through the poverty of a network? Where do you go? How can you get that leg up to live your dream, to create your small business and become lord or lady of your own manor, to employ local people and serve your local community? Areas in need of levelling up have a friends and family gap which stops this root system of independent local businesses from forming. If the government is serious about levelling up, it could use some of the £4.8bn earmarked in the Spending Review for a ‘Family and Friends Fund’ to fill the family and friends gap in these areas.

Fortunately, this is something that has been explored in the US as part of an effort to level up deprived black communities, and their experience is illuminating. They call it ‘institutionalising the rich relative’. Borrowing from their experience, a Friends and Family Fund for levelling up across the UK might look something like this:

Capitalise a set of place-based, evergreen Family and Friends Funds with, say, an aggregate £2bn. An element of local participation through crowdfunding and angel investment will be key. To replicate the functions of friends and family, it is vital that every opportunity and incentive is created for the local community to have skin in the game – and to bring their assets to bear. They may not have as much finance or as many experts as wealthy areas, but they have some. Most importantly, they can spend! 

The fund must offer equity, not debt. Equity releases energy, rather than creating liability. It strengthens rather than burdens. It creates alignment between the small business and the fund – they both want the same things. It says to the small business owner that they have capacity, they are worth investment, they are not dependent and they are not beholden. It is asset based thinking where debt is deficit thinking. Equity opens the doors of possibility to the small business owner.

The instrument is revenue participation. This means that the fund is repaid by sharing in a percentage of the revenue of the business. Experience suggests that this should be capped at 7% of revenue to leave sufficient retained margin for the local business, and that it kicks in two years after the capital injection, to give the local business time to benefit from the oxygen of this new capital.

Businesses for whom this is especially powerful are those who are already going, but where the owner is unable to make a full living or provide employment, so will often have a side hustle. It gives small business owners the breathing room to work on, as well as work in, their business. 

The fund must come with compassionate but rigorous technical assistance – to help the small businesses to act like a business. For example, by insisting on implementing basic user-friendly bookkeeping software or crowding-in connected local business people as investors in the fund (possibly with an EIS-style tax break).

The metrics to measure the fund outcomes are pure levelling up policy goals: the number of sole proprietors who become job creators and of jobs created, and the increase in aggregate wages and gross revenues. 

The fund model is capital preservation, and the revenue participation ends when a 150% return on capital invested is reached. The original equity is returned to the fund (so it is perpetual), with the remaining 50% split between a management fee to cover the costs of managing the fund locally, with an allocation to a reserve account to cover losses from businesses which close. US experience suggests a deal-size sweet spot of £25,000-£50,000, ideally working with businesses that are already trading and have demonstrated their ability to serve their market. The knowledge that a Friends and Family Fund is waiting to support them will give many the confidence to start up, knowing that there’s a leg up waiting for them once they’ve proven their case.

The UK is fortunate to already have in place a network of local organisations who could, in time, administer a Friends and Family Fund. Community Development Finance Institutions (CDFIs); social lenders such as Social Investment Business; or more traditional providers.  Of course, there are many ways to design and deliver such a fund. But the key must be rootedness in place, simplicity, positivity, supportiveness, empathy and compassion. Friends and family are about love, belief and support. A Friends and Family Fund must be based on the same principles. 

If we are to level up, friends and family needs to be an asset class just as private equity and public equity is an asset class. The Family and Friends Fund accomplishes this. We have the opportunity to create a virtual rich relative to provide friends and family support to hundreds of thousands of place-based entrepreneurs who lack access to this. The Spending Review has created a big opportunity: to create a new asset class, the missing link to intergenerational wealth and prosperity in places which need levelling up.