Birmingham City Council has become the first local authority in the UK to take an equity stake in a company as part of plans to boost lending in the region.

The city council has taken a minority stake in telecommunications firm Pure Mobile to help it fund plans to re-brand and restructure. The move will create 15 jobs in Birmingham.

The undisclosed investment, understood to be worth almost £1 million, is believed to be the first instance of a council taking equity in a company for commercial reasons, and is part of wider plans to create employment and value in the West Midlands.

The move has been welcomed by business leaders as a means of stimulating desperately-needed investment into Midland SMEs but the Taxpayers’ Alliance has argued it is not for councils to decide where such funding goes.

Sue Summers, chief executive of Finance Birmingham, said the equity deal was “the first of many”, with more than £10 million worth of loans and equity deals in the pipeline.

She said: “To the best of our knowledge this is the first of its kind.

“Finance Birmingham was founded to deliver innovative funding solutions and access to finance for SMEs. We started with a loan fund, and there is also an equity fund as well.”

The council launched a £10 million business loan fund through Finance Birmingham in January 2010, and a separate equity fund, which offers between £250,000 and £1 million, was later added.

Ms Summers said there was just under £7 million invested – assisting 25 companies in safeguarding and creating around 900 jobs – and plans to “retain that momentum”.

The operation currently has between £10 million and £12 million worth of loans and equity deals in the pipeline.

Ms Summers said there were “rigorous” safeguards in place, including recovering monies if they are not used as promised, or are not benefiting the West Midlands.

“If there is any sense that opportunities are being moved off the patch then we have to act,” she said.

While funding opportunities are judged in terms of the economic benefit to the region, Finance Birmingham investment director John Handley said the investment is part of a new wave of public sector business support approached from a commercial standpoint.

He said: “Before, these things have been done too much from a grant mindset in the public sector, where they don’t expect to get their money back.

“The council is saying ‘we are going to support SMEs but we are going to do it on a commercial basis’.”

Mr Handley, who comes from a private equity background, said there was a clear need to boost lending to SMEs, and the fund was in a position to offer rates of return that were more realistic for firms in the current climate.

“Let’s be realistic, the banks are finding it very difficult to lend to SMEs. Lending to SMEs is at a very low level and there is a shortage of equity and blended funding options in the market.,” he said.

“We are not looking to require the high rates of return that private equity providers are requiring.

“If we can make a commercial return and create jobs and value in the region then we are matching the criteria, but this is not a form of subsidy.

Mr Handley said the fund would expect a capital return in a normal fashion for the private equity market – between three and five years.

Phil McCabe, head of media at the Forum of Private Business, said he was pleased to see an innovative approach to the funding shortage blighting small firms, as long as it did not create a competitive imbalance at a local level.

He said while he had heard of similar initiatives in Belfast and Essex, he knew of no other such investments from a local authority.

Mr McCabe said: “There has been this funding gap for a while now and this looks like an innovative and possibly unique approach to resolving that.

“I have never head of anything like this before, but it seems like a very positive development.”

However, Matthew Sinclair, director of the TaxPayers’ Alliance, said he was ill at ease about councils making financial decisions in the corporate world.

He said: “Lots of councils have lost out by making poor investment decisions, like putting taxpayers’ money in Icelandic banks.

“Investing in new ventures always comes with a substantial risk and taxpayers should be able to decide for themselves if they want to invest their money.

"Birmingham City Council should focus on making life easier for all businesses across the city instead of risking taxpayers’ cash on specific investments in a favoured few firms.”

The first ever equity deal will allow telecommunications firm Pure, which will become known as Pure Business Services, to make Birmingham the fifth city to host one of its business centres.

Since being established in 2006 by Marcus Richardson and Gavin Tedstone, the Pure business has grown to offer telephony services to more than 3,200 businesses in the UK.

Mr Richardson said: “The time has now come to expand our UK footprint and capability, to rebrand as ‘Pure Business Services’ and offer a wider range of products and services to new customers and our existing customer base.

“There is no doubt that the time is right for this investment; it is exactly what is needed for us to execute our plan to become the choice of business services for the SME business community.”

The two entrepreneurs had previously worked at the Caudwell Group – founded by Staffordshire billionaire John Caudwell, and Mr Richardson lays claim to the title of Caudwell’s youngest managing director.

Councillor Timothy Huxtable, cabinet member for transport and regeneration, said “This investment in a dynamic business brings much needed inward investment into the city and, crucially, job creation. Economic growth is key to the Finance Birmingham Equity Fund and we are pleased to have a company with such potential as our first deal.”

John Lamb, press and PR manager at Birmingham Chamber of Commerce, said: “It is to the credit of the council that they have seen an opportunity and taken it, and if it is a first then even better.”

Legal advice for the deal was provided by Adrian Cutler and Mark Canning from Cobbetts while financial due diligence was provided by Roy Farmer from Dains.