Business Money by Business Leader magazine

A special publication by Business Leader Magazine

The Business Leader guide to funding growth in your business businessleader.co.uk

FROM THE EDITOR

HAVE UK BUSINESSES EVER HAD SO MANY FUNDING OPTIONS?

Dear reader, Welcome to ‘Money’ – Business Leader Magazine’s 24-page guide giving you all of the latest trends and analysis around what funds are available for you to grow your business.

With advancements in technology and the rise of alternative finance and ‘challenger’ banks – there have never been so many funding options available to businesses in the UK.

But what approach is best for what type of business? Money aims to answer that question and spark debate around the various funding platforms available. We hope you enjoy. To comment, criticise or collaborate, please contact us on 020 3096 0020 or email: editor@businessleader.co.uk Yours sincerely, Oli Ballard – Editor

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September - October 2018

FUNDING NEWS

Startup Funding Club invests £570,000 into Blue Skies Space Ltd

Maven VCTS lead £2.5m investment in Bright Network Maven Capital Partners, one of the UK’s most active private equity houses, has led the £2.5m investment in Bright Network, a media technology platform which enables blue-chip employers to reach, identify and recruit highquality graduates and young professionals. The transaction includes a £2.15m investment by Maven VCTs, together with £400,000 from existing and new angel shareholders.

Startup Funding Club (SFC) has invested in Blue Skies Space Ltd, a pioneering UK company providing access to space science data from low-cost space missions.

Brightpearl secures £11m in funding and appoints new Chairman

Blue Skies Space is taking a private-sector approach to a traditionally Government-driven area and will provide a commercial service worldwide. The deal marks the 100th investment made by a fund operated by SFC since the launch of the organisation’s first Seed Enterprise Investment Scheme Fund in 2014. The round of £570,000 has been co-invested by the SFC Angel Fund and the tech-focused London Co-Investment Fund (LCIF) as well as a group of Angel Investors. LCIF, which is delivered by Funding London, was established by the London Economic Action plan Partnership, which contributed £25m to the fund, and is supported by the Mayor of London.

James Uffindel, CEO Bright Network

Maurice Helfgott - Chairman

Brightpearl, a purpose-built retail ERP platform, announces a £11m growth round and the appointment of a new Chairman to help drive further expansion.

The company has seen a 77% increase in year-on-year new business growth and has delivered 34% revenue growth in the last 12 months alone. Brightpearl was recently voted the top SaaS company to work for in Britain, beating companies such as Microsoft, Adobe and LinkedIn. The latest growth round for the ambitious tech firm was led by Cipio Partners, who will join existing investors MMC Ventures and Notion Capital.

Barclays launches funding program to show value of faster finance Barclays has launched £100,000 unsecured lending – doubling its maximum for unsecured business loans for small and medium-sized enterprises (SMEs) from £50,000 to £100,000. The bank has also identified more than 40,000 SME clients in the UK, from dentists to manufacturers, that could be eligible for the higher levels of lending, which because it is unsecured could be in their accounts within days.

Business Money - A special publication by Business Leader Magazine

Graham Austin - Head of SME, South West

FUNDING NEWS

BGF backs pioneering medical technology company Evo Dr R.P. Vijayanarayanan BDS - Founder, Evo

ThinCats expands Birmingham presence with new office hires

Damon Walford - CDO, ThinCats

A surgical and high-precision engineering company that provides bespoke full jaw dental implant solutions in a day to patients has received a £4m investment from BGF. London-headquartered Evo will use the funding to expand its clinics, which feature on-site dental laboratories with the latest hi-tech medical manufacturing technology across the UK and explore international growth.

Following a record month of loans totalling £14.7m, alternative finance specialist, ThinCats, has opened an office in Birmingham as it looks to strategically expand across the Midlands. The office, located on Colmore Row, Birmingham, will be the West Midlands base for ThinCats, which will retain its operational headquarters in Ashby de la Zouch in Leicestershire.

SKS Business Services unveil £20m fund for acquiring new partnerships Sanjay Swarup Managing Director, SKS

Award-winning accountancy firm SKS Business Services today unveils a £20m ‘war chest’ to continue its creation of a national network through the acquisition of successful small and medium local partnerships. The loan will fund the acquisition or merger of a further 15 to 20 accountancy and insolvency practices over the next couple of years throughout the UK, allowing SKS to continue its successful acquisition of strong local firms.

Didsbury Tech Park

Property experts granted £3.3m loan from North West Evergreen fund Regional property expert Bruntwood has secured a £3.3m loan from the North West Evergreen Fund, which will be used to develop Phase One of Didsbury Technology Park. The loan will unlock the opportunity for Bruntwood to move forward with plans to deliver c20,000 sq ft of Grade A office space at the site.

Pyroban

Arbuthnot Commercial Asset Based Lending fuels growth at Pyroban Arbuthnot Commercial ABL has announced its latest deal with Pyroban, a global company with interests in explosion proof equipment for hazardous environments. This follows Arbuthnot Commercial ABL’s recent deal with Scotts & Co. The confidential invoice discounting facility, provides flexible funding to enable Pyroban to meet the worldwide demand for explosion protection solutions for the materials handling and oil and gas industries.

September - October 2018

FUNDING NEWS

Augmentum Fintech invests £7m in Tide, Previse and Duedil

John Mould CEO, ThinCats

Technology driving change for peer-to-peer lender

Tim Levene - CEO, Augmentum Fintech

Augmentum Fintech, a FinTech venture capital investor, has announced an aggregate of £7m of investment in three European FinTech companies – Tide, Previse and DueDil. Augmentum has invested a £3m convertible note as part of an £8m funding round alongside existing investors. Tide is an emerging SME challenger banking, based in London. The new funds are being raised as the company prepares for rapid expansion and develops more features on its platform to ease the administrative burden faced by small businesses. Existing investors participating in the investment include Anthemis, Creandum, Local Globe and Passion Capital.

One business that has established itself as a leader in the peer-to-peer lending (P2P) sector is ThinCats. The company was formed in 2011 and has provided almost £300m in funding for businesses. Going forward it has half a billion pounds of institutional and retail funding available for companies looking to growth. John Mould is the CEO and says that ThinCats doesn’t see itself as an alternative funder and his ambition is to see this label dropped altogether.

Augmentum has invested £2m in Previse as part of a £5.3m Series A financing. Previse uses machine learning to give multinational companies tools and incentives to pay suppliers instantly on receipt of invoices.

On what P2P can become John says that technological innovation is having a big influence. He explains: “Technological innovation is making it quicker and easier for businesses to access capital. Central to this are the developments in data – both in terms of processing power and the sheer volume of business data available. ThinCats is obsessed with data, big and small. It uses big data to flag the growth potential of businesses.

This avoids the costs and inefficiencies associated with delayed payment terms whilst transforming the prospects of businesses, often SMEs, which supply large global corporations.

“This not only informs ThinCats’ lending decisions, but also helps identify those businesses most likely to have a future funding need.”

Previse, headquartered in London, estimates that this market is worth £235bn annually. Co-investors in this round alongside Augmentum include Bessemer Venture Partners and Hambro Perks.

When it comes to challenges – John says: “Greater scrutiny from regulators is certainly on the horizon. This news should be welcomed by the sector as it will provide tremendous benefits to the long-term health of the industry by increasing popular trust and confidence in P2P firms.”

Metro Bank provides £800,000 to Yorkshire IT resource specialist Metro Bank has announced that it has provided IT resource specialists, Cranford Group, with an £800,000 invoice finance line, enabling it to expand its business further across the North of England. David Bentley, Managing Director at Business Money - A special publication by Business Leader Magazine

Cranford Group commented: “Metro Bank has truly lived up to their reputation of being fresh, innovative and accessible. The service we received was beyond our expectations and our account manager made the deal process seamless and easy.”

GRANT FUNDING

Spotlight On

Business Leader magazine catches up with Tim Sawyer CBE, Chief Investment Officer

LM talks to Tim Sawyer CBE – Chief Investment Officer of Innovate UK about how businesses can use grants for growth Can you explain more about Innovate UK? It is the innovation arm of the UK government and is now part of UK research and innovation, which was recently formed. It’s all about supporting the UK’s high-growth businesses and also ensuring that the good work being done at universities ends up creating real jobs in the real economy. We operate a network of support sites called catapults that can provide businesses with the support and information they need. We also work with private equity firms to match grants and provide businesses with funding. We have also recently launched a new business loan programme. Regarding the grants you offer businesses – how much is available? There isn’t an exact amount of grant

funding that we are pegged to. Instead it’s about the demand that is there and understanding how we can meet this. In 2017/18 so far, we have invested £177m to 2,465 businesses. What is the criteria for this funding? Historically? We have offered funding for manufacturing businesses but in the last couple of years we have pivoted to a more open structure and if it is a high-growth business, with a good idea we will look to offer support where we can. If it’s worthy, we’ll help. This will range from pre-university spin outs to established businesses. Having said that, if a business is forecasting good future revenues then a loan may be more relevant. An individual business can borrow between £100,000 and £1m. Can you give some examples of businesses you have helped? Lightfoot is a good recent example. The

business is a pioneer in connected car technology and it was the first to secure a £1m loan from Innovate UK to support its growth. How would you currently assess the current state of the UK economy? There is growth within the UK economy and in the latest official figures, GDP is up. But of course, Brexit remains a worry for some investors. Having said that we have seen record levels of investment from overseas companies into the UK – buying and investing in companies. This is partly due to the weak pound but also there has been a major government drive to position the UK economy as a global driver.

OPINION:

Why ‘impact investing’ is driving investment decisions By Belinda Thomas – Triple Point

An important theme sweeping capital markets, which has accelerated over the past few years among private and institutional investors alike, is impact investing.

and Social Governance (ESG) Investing, which just aims to avoid social damage, and Social Impact Investing (SII), where investors forego market returns.

Driven by the desire to invest in funds that deliver a fair market return, while also supporting opportunities that benefit society, Impact Investing strikes a better balance between Environmental

One of the rationales is that the long-term risk-adjusted returns will be superior because the investment approach is in tune with the forces shaping the global economy.

Commercial investing Impact investing is rightly viewed as a subset of commercial investing that happens to be sustainable and makes a positive impact, which is worth some £2bn with £600m of deal flow.

This is because it takes into account the risks and opportunities for businesses transitioning to a more sustainable, low carbon economy, where companies will increasingly be penalised for their negative social impacts. Market reality The Government is increasingly committed to supporting the expansion of Impact Investing and is considering a raft of changes that are designed to increase transparency and governance in the sector to make measurement of the positive impact companies have more robust. September - October 2018

Trusted advisors on your business journey Smith & Williamson’s corporate finance team specialise in advising company owners across the lifecycle of their business. From scale-up to eventual exit, no matter where you are in your journey we are here to advise and support you.

Management buy-out Bristol based software development company, Sparkol, specialises in explainer video programs for desktop and web applications. Its products are used in over 160 countries. We advised the management team in their acquisition of the business in May 2018. The Smith & Williamson team was led by partner Iain Lownes with legal advice provided by Chris Dyson of Ashfords LLP.

“Iain was involved from day one and he and the team at Smith & Williamson were instrumental in getting this deal completed. The MBO will give us the opportunity to grow the business further and to continue to develop the exciting new products which are coming on stream.” Zoe Taylor, CEO, Sparkol

Disposal Owned and operated for the last three decades by the Shipp family, EYMS transports over 17 million passengers annually across the North East of England employing more than 700 people. We advised the owners of the business on its disposal to the international transport organisation Go-Ahead Group plc in June 2018. The Smith & Williamson team was led by partners Philip Moody and Matthew Pearson with legal advice provided by Simon Spooner of Osborne Clarke LLP.

“After 56 years in the bus industry and 38 years with EYMS, selling the business that has been such a big part of my life was a major decision. The combination of experience and sector knowledge that the Smith & Williamson team bought to the project was invaluable. They led the project from start to finish in a highly professional manner and were an absolute pleasure to work with.” Peter Shipp, Chairman, EYMS

Smith & Williamson’s Bristol-based corporate finance team has wide-ranging expertise in mergers, acquisitions and disposals; fundraisings (equity and debt); business planning and strategic advice; and management buy-outs (MBO) and buy-ins. If you would like to find out more about how we can assist your business, please contact Martyn Fraser, head of our Bristol corporate finance team, on 0117 376 2000 or martyn.fraser@smithandwilliamson.com

smithandwilliamson.com By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing. Smith & Williamson is an independently owned financial and professional services group. The firm is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices, entrepreneurs and mid-to-large corporates. The group’s c1,700 staff and partners operate from a network of twelve offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton. Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. The word partner is used to refer to a member of Smith & Williamson LLP. Smith & Williamson Corporate Finance Limited Authorised and regulated by the Financial Conduct Authority. A member of London -Stock Exchange.publication A member of Oaklins International Leader Inc. The Financial Conduct Authority does not regulate all of the products and services referred to here. Business the Money A special by Business Magazine

LENDING

HOW ARE THE BANKS HELPING TO FUND UK BUSINESSES?

he recent Lloyds Bank advert creates a striking scene – a black horse running through history and supporting the public, businesses and communities. But for many businesses post-2008 recession the money dried up from the banks and the black horse didn’t visit any longer – creating a proliferation of alternative finance companies that bridged the gap. It was a catch 22 situation, with many blaming some banks for lending to businesses that weren’t fit for purpose and hence causing an economic condition

that businesses argued they needed bank support to escape from. Fast-forward to the present and lending from banks has slowed somewhat but it’s not the case that banks aren’t lending to businesses – the argument is that they are lending to ‘good’ businesses and funding sustainable growth. Funding for growth The most recent statistics from UK Finance show that the number of new loans to SMEs did increase in Q1 2018. The statistics show that there were 73,971

new loan approvals to SMEs across the UK in Q1 2018, a slight increase from 72,272 in the first quarter of 2017. This uplift was helped by the number of new loan approvals in the production and manufacturing industries increase to 23,707, up from 22,868 in the same quarter last year. In addition to this, total net deposits in the SME sector currently amount to £173bn, exceeding outstanding borrowing of £95bn. In March 2018 gross lending stood at 5,036bn for the year, down from 6,000bn in the previous year.

September - October 2018

BANKS Commenting on the data, Stephen Pegge, Managing Director, Commercial at UK Finance said: “The number of new approved loans to SMEs grew slightly in the first quarter of the year, driven in part by increased demand in the manufacturing and production industries.

Analysis – what does the future hold for the banking sector? By Dr Ru Xie – Associate Professor in Finance at the University of Bath’s School of Management Recent development in AI will dramatically reduce the need for bank staff in roles such as front & back-office functions, trading

“SMEs should feel confident about applying for credit to grow and expand, with banks continuing to approve eight in 10 applications for finance.” The banks Regarding how the banks are supporting businesses with funding for growth, BLM spoke with Richard Bearman, HSBC UK’s Head of Small Business – one of the UK’s major retail banks. He said: “HSBC launched a £10bn lending fund in 2017 to support SMEs in the UK, as part of a broader commitment to helping British businesses to realise their ambitions for growth.” “We are continuing to see lending growth and in 2017 we approved over 90% of all lending applications”. Brexit The UK banking sector has also seen a rise in ‘challenger’ banks entering the market and one which has done so is Oak North. Its Head of Debt Finance Ben Barbanel says the bank is committed lending to UK businesses and that challenger banks are helping to bridge the lending gap to UK businesses. He comments: “Unlike many lenders who have retrenched from the SME lending market since the Brexit vote, we have continued to lend. Prior to the vote, our loan book stood at £98m. By the end of 2016, it had tripled to £300m. By the end of 2017, it had tripled once again to £1bn and by the end of this year, we’ll have a loan book of over £2bn.”

“SMEs should feel confident about applying for credit to grow and expand, with banks continuing to approve eight in 10 applications for finance.”

and risk management. We will soon see AI driving financial services in customer tailored lending, asset management, and investment & insurance products. The outlook for banks is complex. On one hand, the growth of new Fintech start-ups, which can provide innovative solutions and modern financial products, will disrupt the traditional banking industry.

On the other hand, increased competition will stimulate existing major banks to adopt new technologies, improve customer experience and open up new revenue streams to meet the future challenges and opportunities. Relying on the existing advantages in capital, data and regulatory support, banks that are well prepared to adapt to the digital revolution will strengthen their positions in the financial industry. A successful strategy for the preparation of a new banking era lies in greater cooperation with FinTech firms to enhance technology capacity, which can be translated into lower cost, better customer experience, and new income streams.

INTERVIEW:

THE RISE AND RISE OF METRO BANK

LM met with Ian Waters, Managing Director of Business Banking at Metro Bank to discuss how it’s helping companies to fund their growth ambitions.

Can you tell readers how Metro Bank is supporting UK businesses with funding? At Metro Bank we’re well positioned to provide a range of funding solutions for business, from SMEs looking to expand to corporates wanting to take advantage of a growth opportunity. Whether it’s traditional lending and overdrafts, or invoice and asset finance solutions, our focus on relationship banking means we’re able to get under the skin of a business to better understand the type of funding that would work best for them. How much are you lending to businesses? For the second consecutive year we have pledged to ring-fence £1bn net of funds to support businesses across the UK expand, recruit and innovate. Last year we hit this target and I’m pleased to report that we’re well on our way to achieving it once again. What are the stand-out deals you have been involved in? The businesses that we work with come from a variety of sectors, with diverse backgrounds. From providing invoice finance facilities to help companies such as IT resource specialist, Cranford Group, take the next step and expand its business across the North of England, to supporting larger organisations like Canary Wharf Group with a £30m development finance loan to build a new private members club; we’re fortunate to be able to work with a broad range of customers.

Business Money - A special publication by Business Leader Magazine

ASSET FINANCE

Following record investment figures -

what next for asset finance?

ollowing a warning from senior bankers that the UK asset finance market was overheating, and its current growth trajectory was unsustainable, Julian Rose – Director at Asset Finance Policy – hit back, saying that the market was mature and stable; and not overheating. The fact remains that a record £32bn – up 5% in 2017 - in asset finance funding was provided last year and this source of funding is continuing to grow in popularity. Figures from the Finance and Leasing Association (FLA) show that in 2017 asset finance funded almost a third of UK investment in machinery, equipment and purchased software. Of that total, £18.6bn was provided to small and medium-sized businesses – 12% higher than in 2016 – demonstrating that leasing and hire purchase are vital sources of funding for SMEs in a climate where banks are not perceived to be lending to small firms. Mark Treacy, a Director at Lombard Asset Finance, comments: “Asset finance allows businesses to grow by allowing them to spread the cost of buying equipment, sell the equipment they

are using, offload the responsibilities of maintenance and disposal of assets as they use them and much more. “Asset finance offers an extra line of credit which can be used in conjunction with a business’s existing bank loans or agreed overdraft. It’s a quick and efficient source of funds with the ability to fix costs and define terms and payment schedules that helps businesses plan and concentrate on growing and developing.” Future Analysts and experts say that the UK asset finance market is unlikely to grow dramatically in the next couple of years but will remain a key funding option for businesses. On emerging trends that may shape the future of the market, Tim Hawkins, Managing Director at Arbuthnot Commercial Asset Based Lending, comments: “Increasingly, the UK’s SMEs and mid-market businesses are turning away from more traditional ‘cookiecutter’ financing options and looking at how their assets can fuel growth. “With this upswing set to continue, assetbased lending will remain a popular financing solution. According to UK Finance, the combined funds advanced for invoice finance

and asset-based lending stood at almost £22bn at the end of Q1, in 2018 – with asset-based lending industry advances rising by 11% on the previous year to £4.25bn.” Mark adds that technology is also re-defining what a business asset is. He comments:“Traditionally, a company’s value has been reflected in its physical assets, such as plant and machinery, vehicles and financial resources. Today, thanks to the technology revolution and a booming service economy, a company’s intangible assets – including knowledgebased assets such as software and the intellectual property (IP) associated with it – are becoming increasingly valuable.” Advantages On the enduring advantages of using this type of finance, Tim comments: “The key advantage to an asset-based lending facility is that it generates a higher quantum of working capital than traditional sources of finances can typically release. At the core of this is invoice discounting, which provides an immediate injection of cash and on-going working capital to create headroom for the business.”

“The key advantage to an assetbased lending facility is that it generates a higher quantum of working capital than traditional sources of finances can typically release.”

September - October 2018

EQUITY INVESTMENT

MARKET REPORT: UK equity investments

With investment in the UK’s high-growth companies falling in the first half of 2018, we examine what the future looks like for start-ups and scale-ups in the UK.

any of the UK’s most promising young businesses rely on equity investment to finance their ambition and growth plans. Whether from angel investors, institutions and funds, crowdfunding platforms or other sources, equity is a form of financing that – for the right sort of business – can allow rapid expansion, relatively patient growth, and everything in between. Given the few public metrics and data sources of performance of these businesses, measuring the volume of equity investment across all such companies is a valuable indicator of the overall health of the growing company landscape. Cash invested means a growing UK economy More cash invested into fast-growing businesses doesn’t just mean more opportunity to grow, it means the UK is successfully creating and fostering a greater number of promising businesses. But, of course, when we see negative trends, the inverse can also be true. Fall in equity investment So far this year, we’ve seen a fall in the number and value of equity investments received by high-growth businesses. At the same time, the size of the average deal and the average valuation of the company receiving it have both risen. New investors and new types of investors are partly responsible for driving these changes. But new companies and emerging sectors are also having an impact. These changes in the market will have significant effects on the funding landscape for growing companies. Individual investment The number of individual investments into these businesses fell 11%; from 878 in the second half of 2017 to 782 in the first half of 2018. This drop was felt most acutely at the seed-stage – the businesses that are just starting out and may not even have revenue yet. For these businesses numbers fell by 14%.

September - October 2018

TRENDS

In association with Beauhurst, the research and database company tracking the UK’s fastest-growing start-ups and scale-ups. This represents one of the biggest halfon-half drops in deal numbers since 2011 (at seed or otherwise). So, while it would be tempting to put the dip down to the natural volatility we would expect to see in the numbers, we can’t help but worry what the effect on the pipeline of later stage opportunities will be. More noticeable and arguably more significant was the fall in the amount being invested. A fall of over 37% saw a total of £3.27bn invested in the first half of this year. This number is still high compared with historical levels and only just lower than the £3.31bn invested in the first half of 2017. Nonetheless, it means that there is a strong chance that 2018 might see a fall from the record reached in 2017. The drop here is felt most strongly at the growth stage and we’ve seen a significant fall in the number of ‘megadeals’ (investments of more than £50m). There were 23 of these deals in the latter half of 2017 but there have been only 11 between January and June this year. So why the drop? How is foreign investment holding up? The amount that investors headquartered abroad are ploughing into these businesses reached record-levels in 2017. In H2/17 foreign investors were involved in £3.8bn worth of deals, in H1/18 that fell to £2.1bn. However, foreign investors have always been more likely to be involved in these large investments. It is tricky, therefore, to determine the direction of the causality. Is the appetite for UK companies amongst foreign investors dwindling and so fewer megadeals are being done, or does the lack of megadeals mean there are simply fewer opportunities for foreign investors to get involved with? Whatever the direction of travel, one thing is certain; foreign investors, particularly Asian and North American venture capital funds (and indeed, limited partners from the Middle East), are continuing to fill the gap when it comes to high-risk/high-reward investments. The UK’s VC scene is growing each year, but still lacks the scope of Silicon Valley, where a

battery of funds can invest very large sums as a matter of routine. What type of companies are receiving investment? If we look at what kinds of companies are receiving investment, we can start to shed more light on what’s causing the drop in our figures. The number of deals into both Fintech and AI – erstwhile darlings of the UK tech scene – have fallen sharply. This is not to say that either sector is no longer ‘hot’; the two biggest deals of the half were into Fintech companies. But investments into blockchain and VR have climbed to record levels for each.

Business Money - A special publication by Business Leader Magazine

Now, blockchain and VR are more nascent sectors – within the UK ecosystem at least. 72% of companies in these sectors are at the seed stage, whereas only 46% of Fintech and AI companies are. Blockchain and VR companies are therefore less likely to be raising megadeals. Similarly, being smaller and less well-known, they’re attracting less attention from foreign investors – for now. This dip in investment could be a cyclical shift in the sectoral base of the pipeline of growing and ambitious companies. So, we might see a recovery in investment volumes as these companies mature.

DEBT VS EQUITY

Funding for growth: Debt versus Equity

he reality is that your business may require a cash injection at some point to fund it’s growth ambitions. How you go about doing that will throw up a host of options, but it will boil down to the age-old question of debt versus equity. Do you want to borrow to fund your ambitions or do you want to relinquish equity in your business to do so? To provide an insight into both funding options and the trends emerging around them we spoke to key figures in the market. Equity investment Show likes Dragon’s Den have shone a spotlight on the cut-throat nature of businesses receiving investment, but the investor scene is much more demanding, as Andrew Barratt – Director at Shaw & Co – explains: “Dragon’s Den is considering very small investment in early stage businesses. As

September - October 2018

DEBATE

Andrew Barratt Shaw & Co

David Hall YFM Equity Partners

such, an understanding of the market, the proposition and the people behind the business is all that is really needed to decide to support or otherwise. “The truth behind Dragon’s Den, and Angel groups that operate in a similar way, is that a good number of businesses that get offers fail to secure the offer as they fall foul of the basic financial due diligence that follows. “If you are looking at raising several million pounds, the process is significantly more involved, including the preparation of detailed marketing materials and financial forecasts and this is how you will need to operate in the equity investment space.” 60% of £10m Regarding the advantages of receiving equity investment ahead of growth through debt, the principal of 60% of a £10m instead of 100% of £5m holds some stock. This is because investors are incentivised to grow the business and achieve an exit which gets them their money back. As Andrew explains – they will also be able to provide strategic guidance: “Whether debt or equity is right for your business will always be case specific. However, in general terms using leverage (debt) will give better returns for shareholders and if a business has the capacity to borrow, this if often the right option. “That said, debt comes with a servicing cost and can have a binary outcome in the circumstance where a business has insufficient cash to meet this. Equity is much more flexible and will take a longerterm view. The providers of equity are regularly more involved and are aligned to help grow and develop a business over the long terms can offer strategic advice and contacts. Whereas the providers of debt

Angus Grierson LGB Corporate Finance

Alexander Rimmer SME Capital

Gary Hemming ABC Finance

are incentivised to protect their capital and ensure their margin is paid.”

Rob Straathof Liberis

OPINION:

Regarding when equity provides a better option for businesses, David Hall, who is Managing Director at YFM Equity Partners comments: “One way to look at this is to think of debt as the fuel and equity as the oxygen that provide the energy and thrust to a business. “Equity only works if the business grows in value, so its purpose is to provide funding over and above the day-to-day needs of the business, to make that additional investment to support growth or change and provide the headroom and breathing space to take those strategic decisions which have a medium or long-term payback.” Angus Grierson, who is Managing Director of LGB Corporate Finance, says it’s worth considering the cost of equity now: “Equity can be preferable as it generally does not require fixed repayments and gives business owners more flexibility in managing the business and allocating capital in the short term. Equity is also relatively cheap now. While you will be exchanging ownership of your business and decision-making power for growth capital, the right shareholders can bring valuable strategic advice, industry experience and connections.” Debt Clearly equity investment brings with it a combination of funding and strategic advice and a plan for growth. However, debt funding can be a better strategic option for businesses says Alexander Rimmer – who is Business Development Director at SME Capital.

Business Money - A special publication by Business Leader Magazine

Cont. 

Deborah Meaden

What do top investors look for in a business? The dream ticket is when you get an interesting product that has interesting, Investible people behind it. I am always looking for better – and that must be higher, faster, cheaper, more expensive, more luxury, whatever it is. What I am deeply disappointed in is when somebody comes into the den and they can’t explain why anyone would want to buy it or why it’s better. They think it’s a great idea, but they can’t explain why it’s better than anything that currently exists. I want to know why it’s better and I want to know that the person, even if they’re not pitch perfect, has been honest and truthful in their pitch and I want to get to the point where I believe they get it. Also, at the end of the day I expect them to run their business, I’m not going to run it for them.

DEBT VS EQUITY

DEBATE

He comments: “Being able to offer companies a flexible debt solution to help them grow their business is generally a much more attractive proposition that having to give away equity. Often companies need an injection of capital to help with growth and if cash flows are steady – and able to service debt over a 3-5-year period – then to be giving away 30+% to an equity provider isn’t the best option for management teams and business owners.

be an excellent option for those looking to raise capital and offer the advantage of allowing you to retain full ownership of your business.”

“You also hear stories of companies taking on equity funding and a few years down the line, people’s strategy and opinions regarding the business change, leading to a falling out between the management and the equity provider. This can result in disruption in the business.”

Rob Straathof is CEO at Liberis. He comments: “With constant advancements in technology, financial regulations and new waves of thinking, the landscape of modern business is constantly evolving. Open Banking is now emerging within the financial services industry and just a few weeks ago, we successfully processed our first funding application to a small business via this technology.

Value added Gary Hemming, who is Commercial Lending Director at ABC Finance, says that funding growth through leverage is easier than ever for scale-up businesses – with no need for daunting meetings with bank managers any more. He explains: “Unless there is a real value add from an equity partner outside of the cash injection, such as expertise or contacts, an unsecured business loan is a sensible first port of call for business owners. No doubt – business loans can

COMMENT:

One of the benefits of taking on debt can be the speed of decision making. Thanks to advances in technology, you can get an answer quicker than ever before. This has seen a proliferation of alternative finance providers offering business loans.

“Open Banking has the potential to empower better lending decisions and add convenience to the payment process for UK small businesses of all sizes. With this use of smart data, we will see an increase in the number of businesses, previously turned down by banks, who are now able to access credit and receive funding. A significant milestone for small businesses as well as the financial services industry.” 

Debt vs equity – in brief By Steve Ive – Investec When it comes to debt vs. equity, there’s no outright winner – the best solution for you will depend on your business and the challenges ahead. You should be wary of anyone who tries to steer you down one path without looking at the full range of options available to you. For some businesses, debt funding has significant advantages over equity. The most obvious is that debt funding does not involve dilution of ownership – that includes control and profits. Put simply, when you take equity funding you’re giving up a share of your business. It’s worth really thinking about how you’d feel about bringing someone new into your firm, who may have strong views about how it’s run. That can be an advantage, but if you want to retain your independence, debt funding is likely to be a better option. The second key advantage is that it’s generally less complex. Any lender worth its salt will want to do thorough due diligence on your business, may take security and will maintain a keen interest in the business’s performance, but that’s a world away from the complexities of raising equity.

September - October 2018

ALTERNATIVE FINANCE

EQUITY CROWDFUNDING

What next for the new kid on the block – equity crowdfunding?

o find out more about the rise and future of equity crowdfunding, Business Leader caught up with Luke Lang – founder of Crowdcube.

What is next for crowdfunding? We’re already seeing increased demand from investors and entrepreneurs alike; in the first three months of 2018 alone, an unprecedented 58 businesses secured finance on Crowdcube, with a record-breaking £47.4m invested. As a growing number of companies chose to crowdfund their growth, we expect these unprecedented levels of demand will continue to rise.

How is crowdfunding changing the lending economy? Equity crowdfunding provides an alternative funding solution to debt-based funding, such as peer-to-peer lending. On Crowdcube, entrepreneurs can pitch to a diverse group of everyday investors, professional and venture capital firms, who in turn can handpick and invest in the businesses they want to back in exchange for an equity share in the business.

Following the recent increase of the prospectus limit, which enables businesses to raise finance without the need for a prospectus, from £4.5m to £7.2m, we also expect to see a growing number of growthstage businesses using Crowdcube to fund larger rounds.

When it launched, Crowdcube was the world’s first equity crowdfunding platform. Today, over £490m has been pledged on the platform and more than 700 raises have been completed.

Are you seeing a reaction from the banks – with them looking to launch their own crowdfunding platforms? Traditional banks are slow to change. The rapid rise of Fintech firms has driven the industry forward through disruption and innovation and while the big banks are trying to catch up,

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they haven’t necessarily kept up with these relatively new industries. For businesses unaware – how can they benefit from crowdfunding to achieve growth? Crowdfunding is not only an accessible and flexible method of raising finance, it also enables businesses to engage existing networks and establish a relationship with a crowd of potential customers and brand advocates. There is also the post-funding benefit of being supported by a pool of shareholders that can prove to be a fruitful source of skills, contacts and expertise. Companies such as Revolut, Monzo, BrewDog, Emoov and Mindful Chef, which have all raised finance on Crowdcube, have demonstrated how the benefits of crowdfunding can go well beyond an injection of funds.

VENTURE CAPITAL AND PRIVATE EQUITY

WHAT ARE THE TRENDS SHAPING THE PRIVATE EQUITY/VC MARKET? This feature brought together leading figures from the investment scene to debate the trends shaping the private equity and venture capital markets. WHAT ARE THE TRENDS SHAPING THE PRIVATE EQUITY/VC MARKET? Suzanne Lupton, Director of CoInvestment, Maven Capital Partners: “Demand for private equity (PE) remains strong. Funds have raised record levels of capital over the past three years, according to Invest Europe, which has been driven by 16

investors’ desire for strong returns in what has been a benign environment across traditional asset classes. “Persistently low interest rates have favoured PE’s debt-focused model and growing demand has driven asset prices across most sectors, delivering strong returns on exit. Because of the continuing strong demand from investors, there is a significant quantity of dry powder in the market, ready to be deployed – Prequin puts this as £860bn globally.” David Hall, Director, YFM Equity Partners: “Private Equity has for many years produced good returns, so there is increased funding

being allocated to Private Equity and this in turn is increasing fund sizes. For investors, putting more money to work in the sector isn’t easy, and therefore there is encouragement for the GP (manager) to develop their offerings and become a platform. “The tricky part is the balance of matching the right amount of capital to the opportunities - too much funding chasing too few opportunities is, for the investor, worse than the other way around. Private Equity has traditionally been the preserve of the larger ‘institutional’ investor. “As fund sizes increase, the prospect is

September - October 2018

DEBATE

Naturally, this is encouraging the VCT managers to invest in more opportunities per year than they have in the past. “VCTs are still raising health levels of funds that will continue to make their way through the system in the coming years. Suzanne Lupton

David Hall

On mid-market private equity, Andrew comments: “Mid-Market PE is well established and the number development capital funds (or minority investment) rather than buy-out funds has increased to take advantage of the market left behind by the banks after the crisis of 2008. “This said, we are seeing an increasing number of debt options, such as the Unsecured Loans of £500,000 to £5m from Shaw & Co partner Caple, as a real alternative to equity for more established businesses. We expect these debt products to put pressure on this part of the PE market in coming years.” HOW ARE CO-INVESTMENTS IMPACTING THE MARKET? Suzanne: “A key trend has been the growth of deal-by-deal co-investment, whereby institutions and professional clients co-invest alongside GPs in selected transactions.

Andrew Barratt

that GPs will emerge that offer the noninstitutional or so-called high net worth investor the opportunity to invest in funds that have been difficult for them to access in the past.” Andrew Barratt, Managing Director – Shaw & Co: “Working up the cheque size – EIS investment remains popular with individual investors still attracted to the tax rebate and CGT free environment, with the annual limit now raised to £2m this market is growing. “The VCT market is getting itself aligned to the new rules which are forcing investment in earlier stage and more risky businesses.

“Co-investment use has increased in recent years, according to Prequin, where the number of fund managers that offered co-investment rose from 52% at the end of 2015 to 64% at the end of 2017. “This is a trend that we expect to continue as investors continue to seek the lower fee environment that co-investment offers, a bespoke approach to portfolio construction and the ability to invest in sectors and companies that fulfil their risk/return preferences.” WHAT ABOUT INVESTMENT IN ALTERNATIVE ASSETS IN REAL ESTATE? Suzanne: “Another strong trend is growing investment in alternative assets within real estate. Among Maven’s own investor base, there has been strong demand for hotels and student accommodation, which have experienced strong levels of investment activity. “Knight Frank reports that in H2 2017 investment in hotels grew 44% to £5.5bn,

Business Money - A special publication by Business Leader Magazine

while student property investment totalled £4bn, up 25% on the previous year and both are expected to continue their strong performance. To maximise returns for investors, Maven focus is on purchasing assets where there is the potential to add value on change of use through refurbishment and redevelopment and for capital gains to be made through active asset management.” IS THE VALUE OF PE EXITS PREDICTED TO RISE OR FALL IN THE UK IN THE YEAR HEAD? David Hall: “Following the Bank of England’s lead, the weight of money coming into the sector and seeking return seems to be continuing to push prices up in the midmarket and above. This trend looks set to continue and buoyant markets have also helped healthy exits. In the short-term it’s primarily the uncertainty of how the UK is going to disentangle the current trading relationships with Europe that could slow this down. “The increasing weight of money has left a gap for the smaller Private Equity investments (less than £10m equity) and whilst there are a few players looking to plug this gap, it will be interesting to see if this provides an opportunity for the private/ family office market to invest in smaller funds. It’s something that we are seeing, and it could signify the beginning of a trend in the sector.” WHAT ARE THE FUTURE EVENTS THAT COULD IMPACT THE MARKET? David Hall: “The short-term uncertainty around our future trading relationship with Europe is very likely to slow down investment decisions for many. If businesses can’t plan for the long/medium term with some reasonable certainty, it’s very difficult to make an informed investment decision. “All decisions are a balance of risk and reward and if you can see the risk but can’t measure the reward then caution is likely to prevail making it easier to defer and make the necessary defensive investment. These are the macro factors at play that are likely to impact the market. In the long term there will be clarity, but until then it’s the investments that aren’t made that will slow growth in the short term.”  17

Helping corporate transactions cross the line Enabling clients to achieve their financial goals is one of the primary functions of the advice industry. At Brewin Dolphin, we’ve been helping individuals achieve their longterm financial objectives for more than 250 years. This frequently involves collaborating with accountancy firms to offer joined-up wealth management solutions to their clients. As our research has shown, lead advisers value our help when advising shareholders on personal wealth affairs before, during and after company exits. We can provide shareholders with wealth management expertise through all stages of a company exit – from the initial ’how much money do I need to retire?’ question right through to advising on investing the proceeds post-sale. Indeed, partners have told us we add most value when we are involved early on in any potential exit strategy. What’s more, they appreciate that we recognise that the accountancy firm is often the client’s principal tax adviser.

Shareholders

Lead advisers COLLABORATION

Wealth managers

• Working out any shortfall so we can understand how much each shareholder needs from the sale • Helping to reconcile the lifestyle number with the ‘required’ transaction price for the business.

Cashflow forecasting: bringing clarity to the process This analysis really helps clients to see their future wealth. It’s a very effective way of building a broad understanding of what their finances might look like following an exit. It takes account of the potential sale proceeds and any other assets the shareholder may have. It then considers any income and planned expenditure over the course of the client’s life. Cashflow forecasting helps to compare the shareholder’s own understanding of their long-term lifestyle needs with the initial valuation of the business. The results clarify thinking and in positive cases, help remove any uncertainty of future financial security, which can give rise to anxiety over a sale. In negative cases, where a cash flow forecast might reveal to a shareholder that their future share of an estimated valuation will not fund a desired lifestyle after exit, then the possibility of a deferred sale is likely, until a point at which the business has built more value. From our research, most lead advisers would prefer to know that a shareholder team is not ready for an exit for these reasons, than to find out at a later stage when resources might have been committed by the lead adviser at a competitive price.

2. Preparation for sale When a business is preparing itself for sale, as wealth advisers we can work with shareholders to ensure their personal affairs are being considered. We can help through:

Working together across each stage of an exit strategy

• Considering any tax structures that may be driving the transaction and factor these into our advice

In our experience, advice on a corporate transaction typically progresses through three distinct stages:

• Where necessary, sourcing the right insurance products, shareholder protection or key person insurance and putting them in place

1. Early stages of planning for an exit It can be several years before any transaction occurs, but from our experience, many shareholders often don’t know how much money they will need following the sale of their company. We can help clarify thinking by: • Sitting down with each shareholder to discuss their desired lifestyle • Establishing how much capital is needed to achieve these aims through conducting a personal cashflow forecast

• Considering what investments, pensions and savings they already have in place

• Providing pensions advice.

3. Post-completion Following a sale, most shareholders have a significant sum of money at their disposal. We can provide valuable assistance at this time: • We find many clients have no immediate investment plan following a sale and need a cash management service which optimises returns in a tax-efficient way

September - October 2018

• She had a modest pension fund of £200,000 and cash savings of £50,000

• Where investment advice is required, we establish the shareholder’s goals and risk profile before making any recommendations

• Her home was valued at £750,000 with an interest only mortgage of £600,000

• When they are ready to proceed, we can invest the shareholder’s cash into a portfolio of securities aligned to their growth and/or income objectives.

• She was taking an annual salary of £43,000 along with annual dividends of approximately £150,000

Case Study: How knowing ‘the lifestyle number’ can help facilitate a deal

• Her aim was to maintain her comfortable lifestyle throughout retirement (her annual expenses were around £150,000) • If the sale proceeded, Katherine planned to pay off her mortgage and invest the remaining sum to produce an income (after paying CGT at 10%).

Cashflow planning can really improve the medium-term prospects of successfully concluding a transaction. To illustrate how it can help, we’ve summarised below a case where it was crucial in helping the accountant achieve the right deal for the client.

One of our first recommendations was to conduct a cashflow planning exercise. This would show whether the offer would allow Katherine to achieve her retirement goals. The analysis showed that the initial £4 million offer was not enough to maintain Katherine’s lifestyle past age 83 (the bars in the chart below illustrate her remaining assets). As there was a history of long life within the family, Katherine felt this could mean her assets would be depleted too soon. Accordingly, our financial planner calculated that Katherine needed to sell her business for a minimum of £4.6 million (even after agreeing to lower her expenses). The purple line below illustrates this scenario.

Katherine, business owner Katherine’s accountant asked Brewin Dolphin to give her some advice on the sale of her company. Aged 55 at the time, she was keen to step down from the family business. However, there was no family member willing to step into Katherine’s shoes and so a sale was her preferred option. Following some discussions with a competitor, she had received an offer of £4 million and had asked her accountant to advise her on the deal. Katherine was tempted to accept the offer, believing it would allow her to enjoy an early retirement while maintaining her standard of living.

This analysis enabled Katherine to wait for a better offer. She felt much more comfortable participating in the discussions knowing the impact the sale price would have on her future lifestyle.

Aside from the business, Katherine’s situation was as follows: Sale of company

Mortgage cleared Key

4,200,000 4,200,000

Draft recommendations

3,700,000 3,700,000

Financial Planner helps create added value here.

2,700,000 2,700,000

TODAY’S POUNDS

3,200,000 3,200,000

Reduction in expenses

2,200,000 2,200,000

Another reduction in expenses

1,700,000 1,700,000 1,200,000 1,200,000 700,000 700,000 200,000 200,000 -300,000 -300,000 -800,000 -800,00056

101

AGE AGE

Growth rate of 4%, inflation of 3% and no initial fees built in. The returns are net of fees. These results are based on a number of assumptions regarding the client and investment returns, and are, therefore, subject to a number of risks and uncertainties that could cause actual results to differ materially from the assumptions. This represents only one of many possible outcomes.

Building long-term relationships through a collaborative approach Our wealth managers can assist corporate advisers and business owners through all stages of a corporate deal – from the initial research and investigations right through to advising on investing the proceeds of sale.

If you would like to find out more about how we can assist you, please contact Matt Sullivan, head of our national professional services team on 020 3201 3023 or matthew.sullivan@brewin.co.uk Alternatively contact a representative from one of our regional offices. www.brewin.co.uk

The value of investments can fall and your clients may get back less than they invested. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.

Business Money - A special publication by Business Leader Magazine

EXIT

7 tips for preparing your business for sale

his supplement has focused heavily on the funding options that are available to you to help you achieve your growth ambitions. In this section, BLM looks at how you can best prepare your business for sale. The below tips come courtesy of E J Packe, who is the Managing Director of the Supper Club. 1. Why are you exiting? Before you think about how to exit, you need to be clear about why. There are lots of reasons to sell your business. Some no longer feel they’re the best person to run it or take it to the next level. Others want to sell to get the best price. And some simply get offers they can’t refuse. 2. Know your price The most important thing to calculate is the minimum you can sell the business

for after all liabilities are paid out of the proceeds; and whether that number is lifechanging or merely life-enhancing. It will be easier to manage the stress of selling if you understand your sale threshold and know when to walk away. 3. Do not neglect the business Always consider what might be impacting its capital value and salability – even if you’re not looking to sell imminently. Have a clear, long-term plan for the business so your decisions help you reach that goal rather than constantly trying new things. You will be in a stronger position to negotiate a higher multiple if you have the right senior team, a good track record with the numbers, clean data, contracts that are all up to date, and a strong, realistic forecast. 4. Get a good FD or CFO Some members attribute their successful exits to a finance director or CFO with experience of selling a business. They advise bringing them in early to professionalise financial reporting to ensure the figures are

presented in the right way. During the sale process, they can help you avoid under-trading and ensure your operational accounts balance with forecast numbers. 5. Maximise capital value The main drivers of the value of a business are trading history, company size, IP, asset base, management team, quality of your sales and customer base, sector, niche, and market leadership. Buyers typically calculate their valuation by applying a multiple to pretax earnings. They will be more convinced by a three-year profit history than a three-year forecast. Demonstrating a solid pipeline of sales, tying customers into long-term contracts, and consistently hitting monthly targets will help as you’re courting buyers. 6. Succession planning To instill confidence in potential buyers, your executive team must have the credibility, skills, and day to day responsibility for running the business. Try to appoint a reliable MD or CEO and move into a chairman role at least 12 months before you sell. If it’s later than that, buyers may feel it’s still dependent on you. A Non-Executive

September - October 2018

ADVICE

“You will be judged by the company you keep; get the best advisers you can afford to deal with the buyer’s heavyweights” Director (NED) with a strong reputation can add credibility to your business, reassure potential buyers, and advise on the right kind of exit. 7. Get good advisers As one of our member observed, “You will be judged by the company you keep; get the best advisers you can afford to deal with the buyer’s heavyweights”. Corporate finance advisers will help you understand what’s valuable to a buyer, what’s not, who’s buying, and how to achieve the highest valuation and multiple. A lawyer will help you address any due diligence issues that might weaken your negotiating position. A tax adviser can help you structure the sale to maximise wealth by advising on Entrepreneur’s Relief and Capital Gains Tax. Members who have seen the best result recommend talking to advisers as early as possible in the process.

WHAT ARE THE BENEFITS OF GOING PUBLIC?

LM spoke with the London Stock Exchange Group to give businesses all they need to know about floating on the London Stock Exchange. What are the benefits of going public? Joining a public market – AIM or the Main Market – can enhance and help your business grow. Floating on the London Stock Exchange gives companies access to deep liquid pools of capital, both at IPO and for the long-term. What is AIM and the Main Market? London Stock Exchange offers the widest choice of routes to market which are available to both UK and international companies. AIM, the world’s leading growth market and London Stock Exchange’s Main Market are two such markets. AIM is traditionally home to high growth potential, ambitious companies looking to raise longterm equity finance. Over its 23-year history, more than 3,800 companies have raised nearly £110bn through AIM, with 60% through further issuances. Companies on AIM that reach a certain size and stage of

development may seek to transfer to the Main Market. In 2017 companies raised £33.6bn on the Main Market through IPO and follow-on capital. London offers the deepest, most liquid multi-currency capital markets and widest breadth of international investors. What happens in the IPO process? Becoming a public company is a significant decision for a business to make. As part of the preparation process, a well defined business plan is essential as is a demonstrable track record and a clear equity story. Companies will need to appoint advisors for the IPO, a law firm, broker, and others depending on the market they are planning to join. To meet the requirements of the market, companies along with their advisors will look at whether they have the right corporate structure, governance and controls. How long does it take to IPO? The time it takes depends on how much the company already trades like a public entity. Preparation and planning are the most important part of ensuring a successful float and can take 6 – 12 months.

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