In 1945, in between nationalising the railways and creating the National Health Service, the Labour government setup both the rather grand-sounding Finance Corporation for Industry (FCI) and the Industrial & Commercial Financial Corporation (ICFC) to plug the “MacMillan Gap”, a shortage of long-term growth finance for small and medium-sized enterprises (SMEs) that had been identified in the 1930s. Those two bodies were merged in the 1970s to form Finance for Industry, which in turn became Investors in Industry in the 1980s and took on its much more familiar name – 3i.
The company is still around today, albeit under a very different guise and, having floated on the stock exchange in 1994, it became a driving force behind scores of blockbuster private equity deals. Yet that demand for growth finance among SMEs hasn’t gone away; indeed, since the 2008 financial crisis, those cries for help from cash-starved businesses have only grown louder.
That’s why Business Growth Fund (BGF) was setup in 2011 by five of the UK’s biggest banking groups – Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered – to help plug the gap. We were launched with £2.5bn of cash to invest in businesses and we are run as an independent company, chaired by Sir Nigel Rudd.
We typically make initial investments of between £2m and £10m in privately-owned firms or businesses listed on the Alternative Investment Market (AIM), with our portfolio companies usually having turnover from £5m up to £100m. In return, we take minority equity stakes and a seat on the board, typically investing for around five to ten years, longer than most of our venture capital or private equity peers.
But, with the lending market continuing to recover following the banking crash and the UK economy carrying on its growth despite the Eurozone debt woes, why should companies look at equity finance instead of traditional debt? Why give away a stake in a business that’s been created through blood, sweat and tears?
According to the Scottish Government’s business finance report earlier this year, around one in four companies continues to warn that accessing external finance is an obstacle to the success of their business, illustrating the point that companies still need money to grow. When it comes to equity instead of debt, time is certainly a factor. Many entrepreneurs are looking for patient, long-term investors, which BGF certainly offers with its growth capital.
It’s not just about the money though. As well as taking a seat on the board, BGF also introduces our portfolio companies to talented individuals who can help to grow the businesses. These can be advisors who can open doors to export markets or help identify takeover targets, or it can be an experienced pair of hands and a wise head to become chair of the board of directors to help guide firms through the growing pains of life as a high-growth outfit.
Demand for our finance is running high in Scotland, where we broke through the £100m barrier last year, bringing cash and expertise into 17 businesses in total since 2011.
Scotland may only have 8% of the UK’s population, but its companies have successfully attracted one-fifth of all the money that BGF has invested throughout these islands. As a Scot, that’s something that I’m immensely proud about – our rich history of entrepreneurialism is as alive and well today as it’s ever been.
Together, those 17 companies have more than 1,200 staff and bring in revenues of around £295m, making them significant employers and big contributors to our nation’s economy. We’re also starting to make follow-on investments, helping companies to expand even further as they continue to grow.
My own experience comes from the oil and gas industry and our team has completed several major deals in the North-East, despite the drop in the oil price. Our investments stretch throughout Scotland though and across a broad range of sectors, from Morphsuits fancy dress costume maker AFG Media in Edinburgh to Glasgow-based M Squared Lasers. Our pipeline of deals currently stretches from the Borders to Shetland.
While sets of initials like FCI and ICFC may have faded away into the history books, B G and F is making its mark in Scotland. Equity finance has a long and rich heritage and is here to stay, providing an alternative to debt and backed up with the expertise and advice that can help entrepreneurs to move their businesses on to the next level.
Simon Munro is Scotland director at BGF