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12th February 2009
CAT.181
BIRMINGHAM POST (Accessing The Equity Capital Markets)
With the UK economy being hit with a biting Siberian cold front, can Midlands-based companies still find funding to take their business to the next level? Graham Mold, Director with Catapult Venture Managers, takes a look at the bleak economic outlook, but says that private equity funding is still available for well-managed businesses with a plan.
Confidence is not only a critical factor in driving stock markets forward, it is fundamental to the growth of the UK economy as a whole.
Today, the world finds itself largely in un-chartered territory with the financial markets in turmoil, the banking system in crisis and governments’ globally trying to find a way to stimulate bank lending.
When Children's and Schools Secretary Ed Balls – a close ally of Gordon Brown – recently admitted the current downturn was likely to be the most serious in the UK for 100 years, it drove home to businesses just how precarious the current situation is. A few days later the Governor of the Bank of England predicted economic growth in the UK is going to fall by 4 per cent this year (and that’s his most optimistic view).
The big question in these troubled times is how can companies attract funding and just how available is it? Well, clearly some Banks have almost pulled back from lending completely and many businesses are finding themselves in trouble primarily because of this.
However, there are still substantial private equity funds available - although of course there is inevitably a little more caution as to which businesses to invest in.
Catapult is very definitely open for business and our £30m Catapult Growth Fund, which was launched in early 2007, has already invested £5.8m into businesses primarily in the Midlands region (but not exclusively) and can provide funding for up to £2m of development capital or finance for MBO’s and BIMBO’s.
Last year Catapult invested in nearly 30 companies – seven of these in the West Midlands via our Advantage Enterprise & Innovation Fund (AEIF) and, during the third quarter, completed 11 transactions. Clearly, the economy started to rapidly decline after that, but we continue to look to invest in economically robust businesses. This includes enterprises that are currently finding themselves with rather too much exposure to debt and would benefit from reducing this by way of an equity stake.
Up until recently, companies had found it relatively easy to obtain debt funding and in many cases exposed themselves to far more than was prudent. This balance is now starting to be addressed with some enterprises exchanging debt in return for relinquishing a proportion of equity in their business.
So, what do private equity investors look for in a business? Well, first and foremost, a good management team needs to be in place. No one is going to risk investing significant sums in an enterprise unless they have confidence in the decision makers in place.
We look at the fundamentals: is a sensible financial structure in place? Is the company in a declining market, or perhaps successfully operating in a ‘niche’ sector? Would the addition of a ‘Non-Executive’ director open ‘doors’ within the enterprise’s marketplace and help speed growth?
Companies are, in the current economic climate, generally concentrating on investing in the growth of their own businesses, rather than looking to funding for acquisitions.
Whilst Catapult invests in enterprises that require cash in order to move forward to the next stage of development, we are not here to provide ‘stop-gap’ funding to struggling businesses just to enable them to survive the next ‘cash-flow’ problem, unless of course they have a plan on how they will change to survive and prosper.
Investment needs to be made against a business plan with clear objectives. We will consider backing an ailing business if we can identify the ‘untapped’ opportunities that exist and understand why it has underperformed in the past.
Owners need to appreciate that the value of their businesses will have fallen considerably over the past six months and therefore have to be realistic when it comes to valuation. And, given the economic backdrop, owners need to adopt a ‘mindset’ of sharing the risk in order to create something more valuable for everyone. This means addressing the balance between debt and equity. It’s certainly better to have a smaller share of a big pie, than a bigger share of a much smaller one.
And it’s not just the banks pulling away from investment. Private investors are also turning their back – wanting to find a safer haven for their money.
But private equity investors know that even in recessional times that there is money to be made and, sometimes such circumstances provide a buying opportunity.
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For further information contact Graham Mold at Catapult Venture Managers on 0121 616 0180 or 07768 148187 or Paul Shrimpton at PSPR Ltd on 0121 354 7311 or 07979 505322.
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