David Hayers

David Hayers

How to turn IP into lending

Clydesdale & Yorkshire Banks’ growth finance team helps a broad range of businesses to borrow money based on the value of their intellectual property and has now hit a major lending milestone, as David Hayers explains.

It’s been a busy time for David Hayers and his team. As head of growth finance at Clydesdale & Yorkshire Banks Group (CYBG), Hayers has overseen a record year, with the total amount that the team has lent to businesses since its inception breaking through the £100m barrier.

But this isn’t any ordinary lending. The growth finance team helps businesses to borrow money based on the quality of their equity backing and the extent of their intellectual property (IP). IP is often a key asset of a fast-growing, early-stage business, but it is nearly always overlooked by lenders. Companies may have invested many hundreds of thousands or even millions of pounds into developing their proprietary software or patenting a product or process that gives the company a competitive advantage. Yet, when it comes to securing finance, most institutions will look to tangible assets or even personal guarantees to secure a loan.

As Hayers explains, rarely will the growth finance team see a business that has any significant tangible assets. Instead, the team consider the growth trajectory of the company, the extent and depth of the equity support and the nature of the IP. This approach can unlock a vital source of funding for these high-growth companies and taking on debt can often provide an attractive alternative to being further diluted through a further equity round.

“Last year was a record-breaking year, both in terms of the amount of money we lent and the number of companies with which we worked,” Hayers says. “That’s pushed us past the £100m mark, which is a massive achievement for the team and means that we’ve helped a significant number of businesses to grow.”

One of those businesses was Blue Prism, to which the growth finance team provided a £2m facility and which is a world leader in robotic process automation. The company – which lists Accenture, Hewlett Packard Enterprises and O2 among its clients – raised £21.2m when it was admitted to the London Stock Exchange’s (LSE’s) Alternative Investment Market (AIM) in March 2016, valuing the business at £48.5m.

Since then, Blue Prism’s share price has soared, with the company now valued at around £250m. In January, it posted a 59% rise in full-year revenues to £9.6m.

Another customer was Reading-based ActiveOps, which writes software to help companies manage the performance of their operations. The firm, which borrowed £2m in March 2016 to fund further expansion, has offices in the UK, Ireland, India and South Africa and counts lenders such as Allied Irish Bank and Barclays and insurers like Bupa and Hiscox among its customers.

“We saw a lot of software companies coming to us during the last financial year,” Hayers says. “Software firms are usually strong counterparties because they will often have recurring revenues, which helps to give us confidence about the sustainability of their cash-flow.

“This year, I expect we will see an increase in the number of advanced manufacturing businesses that we help. Britain has a really strong reputation in this area and I don’t think we promote these types of businesses enough.

David Hayers“The UK Government’s new industrial strategy also places a heavy emphasis on the importance of areas such as advanced manufacturing and we’re very keen to play our part in helping those companies to grow. These are businesses that could have a major impact on the growth of the UK economy as a whole.”

It’s not just a wide range of industries that are accessing funds through the growth finance team – there’s also a spread of companies from different locations too. The team has members in Glasgow, London and Newcastle, giving it a good geographic spread throughout the UK.

During the past year, the team has completed deals as far afield as Scotland and the North of England down to the Thames Valley and Hampshire. The team lends money through both the group’s Clydesdale Bank and Yorkshire Bank brands.

“Most of our deals are completed outside London,” Hayers points out. “I think that’s important because it shows how we can support companies throughout the country, not just in the capital.”

The growth finance team has also widened its net, so it can provide a range of loans, which now stretch from £500,000 through to £10m, with the average size sitting at about £3.5m. Some of its largest customers are already turning over £20m or £30m, but the majority have less than £10m in revenues.

Some of the businesses among its “greatest hits” have gone on to attract the attention of international suitors.

Livingston-based Touch Bionics has developed artificial hands that have helped scores of amputees throughout the world, with one of its arms even featuring on the music video that accompanied Will.i.am and Britney Spears’ hit Scream and shout.

Touch Bionics was sold to Icelandic peer Össur in April 2016 in a deal worth £27.5m. The Scottish company had previously secured a £2.5m loan from Clydesdale Bank to help it expand overseas.

Aircraft Medical, another life sciences company from North of the Border, borrowed £2.1m to help it fulfil its export orders. The Fife-based business, which designed devices to help medics slide breathing tubes down patients’ throats, was sold in November 2015 to Meditronics for US$110m (at the time £72m).

Innovation is nothing new for Clydesdale Bank, which was been backing entrepreneurs since it was founded in 1838. They included Margaret Gemmel, one of the first women to borrow from the bank, whose solid business plan convinced Clydesdale to lend her £100 in the middle of the 19th century to enter the rag trade.

Even the lender’s banknotes celebrate the lives of inventors. Sir Alexander Fleming and his penicillin feature on the outgoing £5 paper note, while images of Lord Kelvin and his mariner’s compass rest proudly on the £100 note.

In March 2015, the bank became the first in the UK to launch a polymer note. The design featured engineering innovator Sir William Arrol on the front, with his Forth Bridge and Titan Crane on the rear.

A similar proud heritage underpins Yorkshire Bank, Clydesdale’s stablemate. Founded in 1859 by successful businessman Colonel Edward Akroyd, innovation was also at the centre of his vision. He let labourers open savings accounts with as little as a penny and he quickly introduced “school banks”, which got young people into the habit of saving.

That interest in entrepreneurs has come sharply back into focus since February 2016 when CYBG was de-merged from its former parent company, National Australia Bank (NAB), and floated on both the LSE and the Australian Securities Exchange. The £1.6bn initial public offering and CYBG’s entry into the FTSE250 index marked the first time that the business had been independent since the 1920s, following Clydesdale’s takeover by Midland Bank.

Building on its record year in 2015-16, the group’s growth finance team has continued to back a broad range of IP-rich businesses during its current financial year. Among them are Edinburgh-based Ecometrica, which provides environmental monitoring and sustainability management software.

Ecometrica borrowed £622,000 from the team in 2015, with a further £375,000 being lent in January this year. The company recently won a £14.2m contract from the UK Space Agency to lead the “Forests 2020” project, helping developing countries manage and protect tropical forests.

Forests 2020 will monitor 300 million hectares of woodland in Brazil, Colombia, Ghana, Indonesia, Kenya and Mexico. It is the largest contract awarded so far from the agency’s £150m International Partnership Programme and builds on the company’s success in leading a project under the previous International Partnership Space Programme pilot scheme in 2015. “Ecometrica is a great example of the type of business we can support,” says Hayers. “It’s gone from strength to strength and the fact that it has the growth to underpin a second tranche of borrowing so soon after the first is really encouraging, both for us and for the business.

“I’m really pleased with the outlook for this year. We’ve got some very exciting deals on the table, which I suspect we will complete over the coming months.

“That puts us on a very firm footing to continue to help IP-rich businesses to borrow the cash they need to fuel their rapid expansion, without the need for their owners to go back to their investors and further dilute their equity stakes.”