Launched last week by business secretary Vince Cable, the Business Growth Fund, or BGF, is the government’s latest event to end the credit impasse for small firms. The BGF is being steered by Britain’s banks, and targeting companies turning over between £10m and £100m. The banks will invest between £2m and £10m in suitable companies, in return for an equity stake of between 10% and 50%, and a seat on the board.
Given the continuing failure of Britain’s banks to meet their Project Merlin obligations, it’s easy to be cynical about any government-backed initiative to improve finance for small firms. Rather than simply make a sweeping judgement based on previous experience, let’s look at the facts; is the BGF going to be a waste of time, or will it in fact provide a valuable benefit to our country’s new and growing enterprises?
Well, first off, let’s look at the positives. The banks and the government are putting serious money behind this scheme - £2.5bn all told - and major banks like Barclays, HSBC and Lloyds are all involved. If the banks start investing in small firms, it could lead to a much-needed improvement in relations between the two sides.
Furthermore, the banks’ experience, and long-term vision, could prove vital to the small firms they fund. Whereas a venture capitalist will be driven by short-term gain, a bank providing equity investment will commit to the long haul, so the business won’t face the pressure of delivering unrealistic returns, or forcing a quick exit. In fact, a bank could use its position on an investee’s board to tighten up its business plans and rationalise its growth strategy – providing genuine sustainable benefit.
It’s also worth noting that entrepreneurial spirit runs right through the BGF; indeed the fund is chaired by an entrepreneur, Sir Nigel Rudd. Entrepreneurs who apply to the BGF should at least find they are talking to people who are on their side, and understand the nature of the work they do.
And, because the BGF is headquartered in Birmingham, it's likely to cover all corners of the country, not just the capital. Ted Winterton, regional managing director of Bibby Financial Services, told us that the new fund “gives good regional coverage – they’ll have regional offices around the UK so that’ll help the North, North West, the Midlands, and aid firms outside London which have previously struggled to get funding.”
So there are definitely reasons for optimism. But, when one starts to consider the negatives, the cracks instantly start to appear. Firstly, and perhaps most significantly, the firms in greatest need of financial support seem to have been completely overlooked.
The BGF is the by-product of the government-backed Rowlands Review, which discerned a yawning gap in the provision of equity and mezzanine funding for firms turning over between £2m and £10m. Those turning over less than £2m were well-served by angel investors, while those making more than £10m were well-served by venture capital firms.
So what does the government do? It misses out the group identified by the Rowlands Review entirely. Firms turning over between £2m and £10m will get nothing out of the BGF – only those which are already making serious money are eligible for support.
As Chris Barling, founder and CEO of ecommerce vendor Actinic, says, “it’s the smaller guys who find it hardest to get funding", and such companies are being overlooked in favour of a tiny minority. Recent figures from Sage, showing that 97% of the UK’s 4.8 million businesses have a turnover of less than £10m, make the BGF’s terms of reference all the more perplexing.
The targets laid down in the BGF blueprint seem equally baffling. The fund’s managers promise they will invest in hundreds of companies, but as Tim Levene, managing partner at Augmentum Capital, told Growing Business, this does not stack up with reality.
Levene told us that his firm is “a small growth capital fund targeting similar-size deals as the BGF, but we might see 300 opportunities a year, and only do two or three deals. Working on this ratio, if they’re after 200 deals a year, does that mean they see 20-30,000 opportunities?
“They [those behind the BGF] are under pressure to make money available, but they have to be sure they’re targeting the right people. From their perspective, I hope they’re going to be looking to do the right deals, but there’s a risk that they’ll end up working with the wrong type of companies.”
Levene also questioned the amount of equity involved, saying:
“Getting 10-50% of the stake is quite a challenge. They’re not going to get a 50% stake in a firm which is already turning over £10m or more, unless they focus on less fashionable sectors. But I read that they’re going to target sectors like fashion, leisure and media, which are already in vogue.”
Levene’s comments are echoed by Claire Madden, of Connection Capital, who said that, “if you talk to anyone in the mid-market, they can tell you there is already lots of demand for any kind of good private equity proposition.” These comments suggest a two-pronged problem: on one hand, wouldn’t a firm which is turning over £10m have attracted plenty of interest already? And, on the other, why would any firm doing so well want to allow an outsider onto the board?
Finally, let’s touch on a point raised right at the start of the article – why has no-one heard anything about this scheme? Ted Winterton told us that, “if you asked a number of my colleagues about the fund, they’d only be able to give you the headline information.” Given Winterton works in the financial sector, this is an alarming insight.
Perhaps the most damning failure of the BGF on the publicity and communications front surrounds the website, which was still at developmental stage when the venture went live. As Chris Barling said, "it doesn't bode well that the Business Growth Fund is doing a press launch but hasn't got its site up!”
Winterton’s criticisms went even further: “They [the BGF] have certainly got work to do. They should have got the basics right – building a decent website, and ensuring target market, introducer community and press were all briefed properly. But this didn’t happen.”
Such comments leave little room for doubt; the BGF has lots to prove to lots of people, and it won’t get any kind of honeymoon period. Results will be expected straightaway, or the criticism will mount – and reduce the chance of success further.
But let’s not forget the scheme’s only a couple of days old, and no-one yet knows anything for sure. At least the government is doing something to fill the funding gap, and maybe we should cut them a bit of slack – for a few months at least.
As Tim Levene said, “it’s an interesting proposition, and it looks like a positive initiative, with a lot of money behind it. But, ultimately, the proof is going to be in the pudding.” Wise words indeed sir.