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12th November 2007
CAT.104
Rob Carroll, managing director of Catapult Venture Managers with offices in Birmingham and Leicester takes a look at why private equity is good for Britain.
Catapult specialises in providing equity capital for businesses requiring between £200k and £2m, and we are enjoying our best year ever and are on target to complete around 20 transactions across our three funds before the end of 2007.
Since 2003, we have invested in over 52 companies, providing initial and further follow on funding. We now have funds totaling £80m under our management, and transactions in the last quarter are proving particularly buoyant.
Whilst private equity and venture capital funding may have been on the receiving end of some bad press in recent months, the overriding fact is that it has been a springboard for thousands of successful UK companies and a vital wealth catalyst for the economy.
Since 1983 the UK private equity industry has invested more than £80 billion - £60 billion in the UK – in around 30,000 companies, but it’s not just a question of investment levels that make our industry’s contribution so important.
The expertise that we are able to bring to the table can help management take their businesses to the next stage of development. In many cases we introduce non-executive directors that are able to provide additional strategic skills, experience and, very often with sector knowledge and key contacts to the management team.
Research commissioned by the British Venture Capital Association (BVCA) sows that over 90 per cent of companies in which private equity has invested say that without private equity their businesses would not exist or would have grown far less rapidly.
The UK private equity industry is the largest and most dynamic in Europe and makes a significant contribution to the financial services industry and in helping to keep London the leading financial centre in the world.
Each year around 1,300 UK businesses - across all sectors of the economy and all regions of the country - receive private equity funding. This funding is made available to businesses at all stages of development from ‘start-up’ through to MBOs.
It is estimated that firms currently backed by private equity employ 1.2 million people and private equity is estimated to account for 70% of the total annual turnover of the UK financial services industry. Exports from the industry are also higher than the national average.
However, as I mentioned earlier, it’s not just the provision of capital which makes private equity backed businesses successful. Catapult, which manages three funds totaling £80m, recognizes the value of having an investor on board who can introduce a business to a pool of industry talent, well connected and influential Non Executive Directors (NED’s) that will be able to help the business grow much faster.
Historically, venture capitalists (VC’s) have introduced experienced NEDs into deals because they know that this approach is often one of the key determinants between success and failure. Similarly, we know that VCs tend to make more money out of investments when they have an investing NED on ‘board.’
It also stands to reason that if your NED is well connected in the industry they can open doors that can change the direction and value of your business in a much shorter time than they could allow themselves.
Figures from the BVCA reveal that investment in private equity-backed businesses has grown at a far greater rate than the national average. This is underpinned by the fact that in the five years to 2005/6 investment in private equity backed businesses rose by 18% compared with a national increase which attained just 1%.
Another area in which private equity backed businesses benefit is in the area of research and development. Over the five year period, R&D expenditure in venture companies increased at an annual average rate of 13% and this figure rises to 21%.
There is no doubt that some MBO teams may be wary of VC involvement, worried that they will become heavily involved in the running of the business. There is even a widely circulated myth that any non-executive director appointed by a VC is their “spy in the camp.”
The fact is that good non-executives are fiercely independent and that an MBO team will know more about the running of their business than a VC ever will. Catapult’s approach is not to meddle in day-to-day operational matters but rather to provide input on strategic issues and help the Board maximise value for all shareholders.
Our Birmingham office runs the £20m Advantage Enterprise and Innovation Fund (AEIF) - funded by Advantage West Midlands and the European Regional Development Fund - has enjoyed a run of completions since September. This includes leading a £1.2m investment into Synchro Limited, designers and developers of a unique software package for the construction industry.
Two further transactions from the AEIF Fund have been completed during November. The first is a £250,000 investment into Michelson Diagnostics Ltd (MDL), a company developing pioneering technology for cancer diagnosis and treatment. In the second, we were a key investor in a £1.6m funding round into Anaxsys Technology Limited, developers of a revolutionary portfolio of products including an asthma monitoring device.
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For further information please contact Rob Carroll at Catapult Venture Managers on 0870 116 1600 or 07976 226252; or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
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