Traditionally, over 90 per cent of SME financing in the UK has been focused in the hands of just five high street banks. For those banks, of course, unrelenting systemic de-risking means SME lending has just got a whole lot less fun.
For the SME community this is clearly bad news. The bank funding required to fuel growth is costly and it’s hard to come by. The myriad lower mid-market growth capital and buyout houses that smugly occupy this space, however, have just seen their biggest competitor run out of town.
Now, I have always found the lower mid-market crowd rather lackadaisical when it comes to the competitive dynamics of their little corner of the private equity world. Each blithely insists that everyone else has clawed their way up the greasy pole and into the hotly contested mid-cap crush. And yet, in addition to the £330m that VCTs amassed in the last financial year, there are a plethora of small buyout and regional players active in the sub £10m pool, and Westbridge Capital’s debut fund close earlier this month suggests their numbers are continually swelling.
Nonetheless, for a part of the market that has minimal leverage requirements itself, a debt drought clearly means equity opportunities. Still, this is no time to be resting on one’s laurels. The financial markets are nothing if not innovative and gaping holes seldom stay unfilled for long. Indeed, we are already seeing a more plural financing market than we have ever seen before.
The 2012 Entrepreneurs’ Summit, taking place at the Intercontinental, Park Lane, on 13 June and run by Real Deals’ sister magazine Real Business, alongside Investec and the CBI, will be bringing together just some of these rising competitive forces to discuss “the finance challenge”. Private equity should sit up and take note.
The first participant on the finance challenge panel is Will King, founder and chief executive of shaving products business King of Shaves. In June 2009, King announced a “shaving bond”, an issue of 5,000 £1,000 non transferrable and non-convertible bonds, offering six per cent interest per annum over three years.
Creating a whirlwind of publicity, and taking advantage of brand loyalty and rock-bottom savings rates, King pioneered a fundraising mechanism that has since been emulated by many, including retail giant John Lewis. In addition, of course, there is growing momentum behind the creation of a government SuperBond, akin to the old DTI Loan Guarantee Scheme. Indeed, akin in many ways, as King says himself, to a student loan, offering simple and cost-effective financing – crucially with no need to cede control.
Joining King on the panel, meanwhile, will be Andrew Mullinger, co-founder and director of Funding Circle, a collaborative lending business that has invested over £30m in more than 700 companies since its launch in 2010. Once again, taking advantage of miserly savings returns, Mullinger’s model means it can undercut what he calls “laughable bank rates”. A recent government commitment to back peer-to-peer financing initiatives, meanwhile, means Mullinger is the only one laughing now.
Third on the finance challenge panel is Neil Murray, chief executive of Liverpool-based pharmaceutical business Redx Pharma, which received close to £6m from the Regional Growth Fund last year, one of a growing number of government initiatives designed to stimulate growth, and in particular jobs.
Next up is Ed Cottrell of Investec, representing a fresh and innovative alternative to the traditional banking sector – operating across the capital structure including mezzanine, minority equity and ABL.
And last, but not least, we have Stephen Welton, chief executive, of course, of the contentious Business Growth Fund – a mechanism by which those self same high street banks – which were hitherto providing more than 90 per cent of SME financing – are still backing small and medium-sized enterprises – just in pursuit of an altogether higher return.
Now, of all the panel participants, the Business Growth Fund, ironically, represents the least threat for the small buyout community, setting a minimum threshold, as it does, of £10m in revenues. Nonetheless, this is an equity juggernaut that is guaranteed to ride roughshod over lower mid-market minnows.
Indeed, far from a clear road ahead, it could be argued that the bottom end of the financing market is becoming more complex and highly populated than ever.
There are over 15,000 financial institutions lending to companies in the US, of which only around half are banks. The current drain on banking appetite means a similar model in the UK seems inevitable. And the reality is that for many entrepreneurs, ceding equity, let alone control, is a mighty big step to take. Any alternatives will be taken very seriously indeed.
The small buyout market has always congratulated itself on identifying a quiet pond with an awful lot of fish. But it looks like some big boats are determined to cut up those quiet waters.
The Entrepreneurs' Summit will bring together over 200 high-growth businesses to debate the challenges facing SMEs today. Other headline speakers include Vince Cable, Errol Damelin of Wonga, Lloyd Dorfman of Travelex, Paul Lindley of Ella's Kitchen, Dermot Rowan of Kiely Rowan, Stuart Garner of Norton Motocycles and Sam Ferguson of EDM Group.
Join them for an unrivalled origination opportunity – and bring a portfolio company for free! Simply contact Silvia: email@example.com / 020 7045 7600 or register online and enter details of your portfolio company contact in the group bookings section.