Sam Smith is the CEO of finnCap Group plc. Here, she talks about how you can successfully raise capital during the lockdown period.
Fundraising during this COVID-19 crisis is probably one of the greatest challenges growth companies face. While cutting costs and rationalising operations can help stabilise businesses, it’s having access to the capital that companies need to both underpin their short-term survival as well as finance their continued development, which is key to their long-term sustainability and growth.
Clearly raising capital in the midst of a pandemic presents unique challenges and many businesses have struggled to address these issues. However, companies, both listed and private, with an attractive proposition, a well-thought out strategy and willing to embrace new approaches to fundraising in this difficult environment can still secure the finance they need to drive their expansion and commercial success.
Public companies continue to raise funds…
Fundraising on public markets has been challenging for some time. Last year was the slowest 12 months for fundraising activity on London’s stock markets since the financial crisis a decade earlier. However, a big factor in this was the uncertainty caused by Brexit and, with the withdrawal agreement signed, at the start of this year a host of companies, including 02, Walmart subsidiary ASADA, McLaren Group, Tata Motor Group’s Jaguar Land Rover and Deliveroo, were all reported to be considering a London listing.
Although these plans have largely been put on hold, companies are still able to raise funds.
For example, on AIM, where finnCap is most involved, total money raised (from both new and further issues) in Q1 2020 was £1.01bn, more or less flat on the same period last year. There we six new joiners to AIM, raising in total just over £180m.
Secondary fundraising has been active, particularly post the March 18 market low, with over £450m of secondary raises announced from March 18 to the start of the Easter weekend on April 9.
Notable transactions were ASOS, raising £247m earlier this month, with Hotel Chocolat and Everyman Cinemas two other well-known companies to complete successful equity placings.
However, these equity issues have not come without controversy.
In order to make it easier for companies, regulations around pre-emption have been temporarily relaxed, with companies now able to raise up to 20% of share capital without offering a right of first refusal to existing share-holders.
This has caused concern particularly among smaller investors who feel they are being shut out of new placings, which offer shares at significantly reduced prices.
Retail investors, in particular suffer on AIM.
They own on average a quarter of companies listed on the AIM, compared to just 13% on the market as a whole. Primary Bid, which has helped coordinated a letter questioning the changes and which has been signed by a large group of shareholder representatives, is one company trying to ensure retail investors are represented.
A new digital financial services app, Primary Bid has a platform that makes it easy to connect retail investors with public companies raising capital and works directly with the London Stock Exchange.
Indeed, retail investors are an increasingly important cohort. Europe, including the UK, has witnessed a recovery in retail ownership of listed companies since the 2008 financial crisis. European households own 15.6% of listed shares across EU and UK stock exchanges, up from 13.3% in 2013 and 12.7% in 2007.
..as are private growth businesses
There is also still scope for private companies to raise funds too. The funding landscape today is far broader than a decade ago with an array of capital raising opportunities for companies to consider. Regional growth funds are helping small and mid-cap firms raise equity and debt, while alternative Peer2Peer lenders, venture capitalist and private equity and debt houses have significant reserves of dry powder ready to deploy.
Most recently, the Government has launched the £500m Future Fund to support, in particular, early-stage growth businesses. While start-ups certainly need funding, the fact that a company needs to have raised at least £250,000 in the past five years to be eligible does not support wide access to the Fund given the predominance of male-led, London and South-East based among companies that have successfully raised such early venture capital funding.
I have signed an open letter, together with 50 leading investors and entrepreneurs, to Chancellor Rishi Sunak, urging him to set an “aspirational target” for backing diverse founders via the £500m Future Fund.
Over the past two months at finnCap we have completed 12 transactions, both debt and equity, raising almost £100m and with a total deal value of £315m. Certainly in seeking to raise fresh funding it helps if there is a COVID-19 aspect to the company’s strategy.
For example, last month we raised £14m for listed drug discovery and development firm Synairgen plc, which will use the funds to conduct a vital phase II clinical trial of its candidate SNG001 drug in COVID-19 patients.
It also helps if a company is breaking new ground and has a compelling new approach to a sector.
A case in point is Bella&Duke, a subscription home delivery service for premium raw dog food, making it easy for dog owners to feed their pets for optimum health. We advised the company on a £3.5m fundraise in March this year to provide the finance for its growth plans.
In the debt arena, we recently worked with financial planning company HFMC Wealth, advising the company on securing necessary debt facilities to allow its acquisition of Aspinalls and also advised PCI Pal, a global provider of secure payment solutions, to raise £5m in order to help secure its future growth ambitions.
Based on our recent successful transactions there are some important lessons we have learnt and below are the key areas we advise businesses to consider:
• Frame your strategy the right way – When talking to investors, it is vital to demonstrate advance thinking on the current situation, how you are scenario planning, and any changes you have made for the next three, six and 12 months.
• Communication is key – approach those already in your network and raise your profile. Make sure you are clearly communicating what you are doing and what your plans are. Be honest.
• Lockdown does not mean you are alone – Face-to-face meetings might not possible, but investors are adapting and conducting virtual meetings. Due diligence site visits are difficult, but companies and their advisors are exploring video/virtual options.
• Be realistic – These are extraordinary times, do not expect the valuation you could have commanded for your business six months ago, but consider tiering the funding to reflect potentially a rising valuation as hopefully business conditions improve.
• Seek advice – You are not alone. There are advisers, such as finnCap, which are actively and successfully working to connect growth companies with the investors.
Raising funds may now be difficult, but investors still have an appetite to back exciting, innovative firms with excellent long-term growth potential. Business may be tempted to stall their fundraising plans, but we believe that those companies and management teams that have the courage and determination to press ahead will have every chance of being rewarded.