A flood of funds chase UK private businesses

London: Th e confidence and can-do attitude of many owners of established private businesses is summed up by Michael Oliver, who founded his company in his garage after being made redundant in the 1970s.

“I’ve never thought of selling out. Why would I want to work for someone else?” he says, after 36 years in charge of Oliver Valves, which supplies the offshore oil and gas industry.

“I compare running a lean, private business to a commando unit,” he adds. “A business saddled with private equity investors and external advisers is more like a large regiment — far harder to manage and manoeuvre.”

Oliver’s own Cheshire-based business might soon be regimental size. It employs 300 people and has annual revenues of almost 100 million pounds.

Private businesses come in all shapes and sizes—- from individual or family ownership to private equity, partnerships and employee trusts. All but about 2,000 of Britain’s 5.2 million businesses are privately owned.

They range from the “Big Four” accountancy firms to Warburtons, the family-owned baker that is Britain’s second-most frequently purchased brand after Coca-Cola.

And they are back in fashion. While the stock market was once the destination of choice for a successful business, investors are now eager to buy in to private businesses.

In Europe, late-stage investment in the first half of 2015 reached 4.1 billion euros, compared with 2.3 billion euros in the same period of 2014, according to PitchBook, the US research company.

Some investors believe that in a rapidly changing world, private businesses can react more swiftly than listed entities, which are often heavily encumbered by layers of management and accountability.

Technology companies such as the British-owned Shazam, the music recognition app, have been valued at more than $1 billion in early stage funding rounds.

Another sign of the growing importance of private businesses is the election this year of Paul Drechsler as president of the CBI, Britain’s biggest business lobby.

Apart from Dame Helen Alexander, who held the post soon after leaving the Economist Group in 2008, he is the first private business leader appointed to the role since the mid-1970s. Traditionally, CBI presidents are drawn from large listed companies.

Drechsler is chairman of Bibby Line, a family-owned conglomerate in Liverpool. He says the CBI is right to focus on private companies.

He points out that family businesses employ 9.4 million people—- equivalent to 40 per cent of private sector employment.

“The percentage of business that comes from new products is 8-9 per cent,” he says. “That is three times the rate for business overall. They have a lot of entrepreneurial spirit. Bigger, listed companies often rely on innovations from the sector.”

Bibby Line is an example. Still almost entirely owned by the Bibby family, it was founded as a shipping line, but now encompasses a logistics business, asset-based lender and the Costcutter supermarket chain.

But Drechsler points out that private businesses continue to face particular and pressing problems. “Capital is a challenge, especially long-term capital.”

A survey, Stepping Up, published in August by accountancy firm BDO and the CBI, found that half of medium-sized businesses struggle to secure a loan for longer than five years.

It can be tough for a private business to find experienced managers, so more could be done to promote the sector, Dreschler adds. “It is a fantastic sector to work in.”

The CBI is hoping to encourage a British “Mittelstand”—- the German privately owned companies that form the backbone of the country’s economy and export success.

The government’s British Business Bank, meanwhile, has invested 2.3 billion pounds in smaller businesses. The big private banks have formed the Business Growth Fund, which takes long-term equity stakes in growing companies.

The biggest peer-to-peer lenders have lent a cumulative 3.2 billion pounds since 2005. However, net lending to SMEs by members of the Peer to Peer Finance Association fell from 78 million pounds in the second quarter of 2014 to 67 million pounds a year later.

More and more private companies are issuing retail bonds for direct sale to private investors. The UK Bond Network is an online platform that allows sophisticated private investors to buy them. It has raised 6 million pounds so far.

Chris Maule, its founder, says it scrutinises issuers and can run auctions to decide the interest rate on the bond. It has 800 investors, who each have to invest at least 5,000 pounds. “I would have done more deals, but we make sure we pick the right companies,” he says.

Pemberton Asset Management raised 550 million pounds in six months for its direct lending fund, with pension provider Legal & General among the investors.

Pemberton provided a seven-year loan to Daisy Group, a telecommunications and IT services provider, to allow it to delist from Aim. Symon Drake-Brockman, chief executive, says: “We firmly believe that asset managers and institutional investors will become increasingly important in providing long-term capital to mid-market and growth companies.

“In the current low interest rate environment, real money investors such as pension funds, family offices and insurers are actively looking for ways to diversify their investments, match their liabilities and generate higher yields.”

Private investors can also use the tax-friendly Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) to take equity stakes in start-ups. In 2013-14, 2,710 companies raised a record 1.5 billion pounds through the EIS scheme.

This was up from 1 billion pounds the year before, while 164 million pounds was raised through SEIS—- almost double the previous year.

But Deacon of accountancy firm BDO, who worked on the Stepping Up report, says as the UK economy recovers, companies need money to hire staff and pay for machinery to meet greater numbers of orders. Many turn to asset-based lenders, who advance money against equipment or unpaid invoices.

The Asset Based Finance Association (ABFA), the body that represents the industry in the UK, said in June that a record 4.2 billion pounds is now secured against physical assets, up 9 per cent on a year ago. Overall asset based lending was up more than 6 per cent to 19.3 billion pounds.

Jeff Longhurst, chief executive of ABFA, says: “Borrowing against hard assets is one of the innovative forms of alternative finance that has really gone mainstream in the last couple of years.

However, Deacon points out that asset-based lending is seen as a panacea for funding the recovery, but argues that it is not. “It is very easy and quick to get. It is difficult to get out of,” he says.

But Oliver remains unconvinced. “There has always been the option of taking on debt or external equity investors. But you only grow a business within the constraints of cash and people—- many companies overextend themselves, run out of cash and fail.”

Financial Times