Bill Nixon, Managing Partner of Maven Capital Partners spoke to Business Leader regarding how private equity firms can help rebuild the UK’s SMEs post-Covid-19.
UK SMEs have endured their toughest year for generations. Almost a million are at high risk of failure according to a recent ONS Business Impacts survey. For those that have come through the fire, there is still an urgent need for support as businesses begin to re-open, often with reduced resources or a weakened balance sheet. This support is required across the entire SME economy, particularly as Government financial support is withdrawn over the next few months.
In reviewing the funding sources that can help to address these needs, private equity firms are particularly well placed – they have the capital and in-depth expertise to ensure that funding is available to those ambitious growth companies with the best chance of recovery and success and can also provide the vital hands-on assistance to help management teams looking to restore growth to their business. Private equity investment can also help shape a more sustainable economy, fostering not only innovation and job creation, but also strong ESG principles, that will help the UK emerge from the crisis with businesses that are well funded, more competitive, and also greener.
Government intervention measures have been crucial
The Government has implemented much-needed measures to help businesses. More than £19bn in CBILS loans and more than £43bn in Bounce Back loans had been approved by the end of 2020, although the window for further applications will end on 31st March and the Future Fund closed in January. A successor to CBILS has been announced: a Recovery Loan Scheme (RLS) which will run until at least the end of the year and guarantees 80% of the finance lenders provide.
Debt alone is not the answer
With SMEs taking on an estimated £80bn of debt during the pandemic from both Government-backed loan schemes and VAT deferrals, additional debt is unlikely to be the sole answer as companies will need funding for further growth to service and eventually pay off their increased debt levels. Securing fresh investment will therefore be at the cornerstone of the recovery.
Listed companies have the option of raising additional capital through share issues which they have been actively doing – close to £30bn was raised on public markets by companies last year. However, for private businesses, of the range of available funding options open to them such as family and friends, family offices or investor syndicates, experienced private equity firms offer distinct advantages. As a starting point they have an excellent understanding and experience of SMEs’ funding needs, typically based on the experience which comes from building up a portfolio of growth businesses over many years. They also have the scale, resources and capital resources to help make a significant difference to the growth prospects of SMEs.
The capital requirements of SMEs will also be varied, depending on the type of financing required, the development stage of the business, the products or services offered and the target markets in which they operate. This makes regional and sector expertise crucial, and those private equity outside of the South East can help many local companies finding a funding solution to allow them to achieve their ambitions. For example, Maven now operates from ten investment offices across the UK, has a team that has been supporting SMEs for approaching 20 years, and also manages almost £200m of regionally focused fund mandates. This includes parts of the flagship Northern Powerhouse Investment Fund and Midlands Engine Investment Fund, both launched by the Government-owned British Business Bank, as well as the Finance Durham and North East Development Capital funds.
This regional profile gives Maven an on-the-ground local knowledge and the ability to work with some of the UK’s most promising smaller businesses, across a wide range of vibrant sectors. And, while private equity firms have focused on preserving value by supporting their portfolio companies through the pandemic, well-resourced managers have continued to make new investments to build their portfolios for the long term and at the same time support ambitious SMEs. Through its Venture Capital Trusts (VCTs) Maven has completed new investments since March 2020 in 11 ambitious private companies, which are active in defensive sectors such as software, cyber security, data analytics, training and healthcare, which are generally less directly consumer dependent and where underlying trading has been less affected by the emergence of COVID-19 in the UK.
VCTs are a particularly effective vehicle for funding earlier stage companies with the highest potential. As well as supporting emerging companies, they also offer investors a unique package of tax breaks, including up to 30% initial tax relief and tax free dividends. VCTs raised more than £600m to invest into high growth UK SMEs in the 2019-20 tax year alone, and Maven has four long-established VCTs with a strong record of supporting innovative growth businesses across the UK.
Benefits of private equity ownership
Research by Stanford University highlights the broader benefits that private equity can provide businesses. Private equity backed firms suffered a significantly smaller decline in value than comparable sized firms in the 2008 financial crisis, while they also increased their assets more rapidly and enhanced their market share during the crisis. This greater resilience owed much to better access to financing resources, largely thanks to the ‘dry powder’ of unspent capital available to private equity firms, as well as the benefits of the commercial and market insight of working with experienced private equity investors.
Private equity can also help businesses with their long term M&A ambitions. Covid-19 has forced many companies to adapt their growth strategies and business models to new economic conditions, whether this means developing new or add-on products, launching new services or moving into new markets. Bolt-on acquisitions have proved a popular solution, accounting for 61.2% of buyout volume in H1 2020, and this capacity and expertise in tandem within a private equity firm means its executives can play a positive role in helping a business to grow beyond simply providing capital.
We should also bear in mind that private equity firms have the experience and credentials to help their portfolio companies with proactive support and advice in other areas, such as on turnaround, refinancing and restructuring their operations – which are perhaps needed as never before.
Helping build a better future
Private equity has played a key role in tackling the Covid-19 crisis. For example, several of Maven’s portfolio companies have been involved in efforts to help the UK cope with the pandemic. Westfield Medical, for instance, has provided a special barrier textile to British manufacturers for use in producing PPE for NHS workers, while Martel Instruments, a developer of bespoke printers, has helped provide physicians with printed test results in time-critical facilities where the Wi-Fi connection is unreliable.
There is also a pivotal part for private equity firms to play in helping shape the more sustainable, tech-enhanced economy that emerges from the Covid-19 pandemic. Investment in technology will be critical as we adapt to the post-pandemic reality, part of the trend of digitalisation sweeping the economy. Last year venture and private equity investors helped start-ups and scale ups raise £12bn of investment, which was dominated by innovative sectors such as fintech (32%) and enterprise software (16%).
Private equity firms are also increasingly prioritising investment in companies with impressive sustainability and ESG credentials. About half of the institutional investors recently surveyed by EY plan to increase their ESG private equity and venture capital allocations over the next two to three years. There is an increasing recognition that companies that have ESG at their heart are more in line with the long-terms trends shaping human behaviour, society and economic activity and will therefore likely be more resilient and more valuable in the long term.
At this crucial time in the recovery of the UK economy, the private equity industry is uniquely placed to make a positive contribution. The industry employs hundreds of people across the country, with access to capital, allied to experience of helping businesses grow or adjust to market or finance related challenges. Private equity is ready and willing to play its part in restoring the economy to its previous growth trajectory.