SCOTLAND'S economy is continuing its fragile recovery from the devastation of the 2008 banking crisis, although it remains to be seen how this will be impacted by the recent Brexit vote and ongoing political uncertainty facing Scotland, the UK, the EU and indeed the world.

However, at present, Scottish banks are keen to lend to the corporate community. The intense competition amongst banks, together with continuing low interest rates, makes it an ideal time to be a borrower, provided you have a solid business with a good track record.

Why then are there not more businesses beating a path to the bank door?

With such political uncertainty, few businesses have the confidence to stretch themselves financially by incurring debt, regardless of how cheap that debt may be.

The impact of this is that while the economy may be recovering it will be a very gradual progress with cautious, organic growth rather than a dynamic expansion fuelled by transactional activity supported by debt.

Another important factor restricting the banks’ ability to lend is the lack of management buyout activity. In the past this has been a sensible route for succession planning or providing fresh impetus to businesses. It normally arises when a mature business is sold by founders to the existing management team; providing an exit for founders and incentivising management to excel in performance through their active ownership of the business.

In order to pay for the business the management team need to raise substantial capital and this is traditionally achieved through a combination of bank debt and private equity, the latter being an equity investment by a fund which specialises in investment into private limited companies. In return for a substantial ownership stake in the business these private equity or venture capital funds will provide the necessary funding alongside the banks to acquire the business from the founders.

For those, like me, long enough in the tooth to remember the nineties, 3i, a major private equity player operated from offices in Glasgow, Edinburgh and Aberdeen often doing a deal a week. . However, due to a number of factors this frenetic activity gradually abated and there is now a dearth of private equity funds operating in the Scottish market - 3i no longer has an office in Scotland.

Contributing factors include the fact that larger deals generally make bigger returns for the same effort so there is a focus in the South, where there are more large deals to be done; and the fact pre-crash, banks stretched debt levels, reducing the amount of equity required and consequently the return on investment for private equity.

Even those funds based in Scotland tend to focus on the markets in London, Birmingham, Manchester and Leeds where there are richer pickings.

If a business founder has established a successful business and wants to exit, the most likely route is through a trade sale, usually to a larger competitor and if the buyer is an overseas entity, this removes value from Scotland’s economy.

So, what can be done? Organic growth may be the conservative way forward but if we want a progressive economy in a nation well regarded for its entrepreneurs and enterprise then there is a requirement for increased private equity and the opportunities it brings. However, private equity funds are not charitable organisations - they require return on investment and if they are not operating in Scotland then it is because better returns are being made elsewhere.

How then can we incentivise private equity funds to invest in Scotland? An obvious solution would be tax incentives for investment in Scottish businesses. These are already available to individuals investing in start-up companies, through the Enterprise Investment Scheme but could be extended to private equity funds in some manner to enhance their return on investment in Scotland. Doing so could increase overall tax takes, offsetting any lost revenue from individual transactions.

In the current political climate with its disdain for "fat cats", such a solution may not be palatable but there is a need for a kick-start to transactional activity. While properly incentivised private equity funds may not be a panacea for all ills, they definitely provide scope for increasing activity.

Increased private equity investment will generate increased lending, increase activity and help grow a confident economy, hopefully to the benefit of all.

David Morton is a Partner at DLA Piper in Edinburgh