LSE's Elite: just another pre-IPO programme?

In late April, LSEG launched Elite, a programme that brings together high-growth companies to help them access and prepare for investment to support further growth. The programme was first launched in Italy in February 2012 and thanks to its success, LSEG was keen to replicate it over in the UK.

Elite has so far inducted 19 fast-growth companies onto the programme, all of which were identified by Deloitte's Fast Fifty programme. The businesses have entered into a 24-month "journey", divided into three stages. Stage one will focus on education, delivered by Imperial College Business School and LSEG. Stage two looks at issues specific to high-growth companies and creating plans for change. Stage three will prepare the cohort for accessing investment.

"We came into contact with LSEG through the Deloitte Fast Fifty programme. We were very excited to join as we had been labelled as an ambitious company," says Graeme Malcolm, CEO of M2 Lasers, one of the first companies to join the programme. "At the moment we attend several half-day sessions with LSEG and Imperial College where we listen to various talks and presentations. The first session was about getting to know each other, to enable cross-fertilisation of ideas. We met a range of businesses across different sectors at different stages in their development."

BGF's Welton argues LSE's Elite programme could create new deal opportunities

However, several of the companies on the programme have already received growth funding. These include Amplience, which secured £37m from Octopus in July 2013; Graze, backed by Octopus, DFJ Esprit and Carlyle; Instrinsic, supported by RJD Partners in its £30m buyout in July 2011; Kitwave One, which received £7.5m from NVM in March 2011, as well as additional funding to support several bolt-ons; Secret Sales, which secured £6.3m from Doughty Hanson and Pentech Ventures among others; and Unruly, which received $25m in January 2012 from Amadeus and Business Growth Fund. With so much third-party capital having already gone into these companies, it would seem as though this is simply an IPO preparation programme.

Aiming high
According to BGF CEO Stephen Welton (pictured), the aim of the programme is far more ambitious. "It will shine a spotlight on growing companies, showing that there is a way of growing through the public market and other forms of investment." Welton believes a deep cultural shift is needed for smaller UK companies, which remain reliant on debt to fund growth.

Marcus Stuttard, head of UK primary markets & AIM at LSEG, says: "The term 'UK SME' covers a broad range of businesses, from very small organisations to larger employers. By creating something akin to the Mittelstand there will be a greater recognition that the highest growth businesses have the ability to make a real impact on employment and GDP."

A key objective of Elite is to create a unified culture for UK SMEs as a means of stimulating overall economic growth in the UK. "The mid-market and the lower mid-market are incredibly intermediated. One thing that private equity needs is more opportunities. Stimulating growth from the bottom will create more dealflow for private equity," says Welton, adding that private equity works in a classic pyramid structure. "The larger more visible companies with rapid growth are courted by media and advisers, which in turn attracts private equity. But this structure ignores tens of thousands of companies underneath these larger, more visible groups."

According to Welton, there are 4.8 million SMEs in the UK, the majority of which generate less than £1m in turnover or employ less than 10 people. He states there are around 25-30,000 companies in that group suitable for BGF investment. What is most intriguing is within that pool of companies a mere 2% have accessed some form of third-party capital. "If that 1-2% group of companies receiving third-party funding becomes 3-4%, the multiplier effect is enormous; the result would be more companies available for private equity," says Welton.

Big picture
The most vital aspect of what Elite is attempting to achieve is that whether or not these small, fast-growing companies choose to raise growth capital through the public markets (not forgetting that this is precisely what the stock exchange was first set up to do), these businesses will have already been given the ability to step back from day-to-day running to think more strategically about growth, and crucially have a better awareness of the options available to them. "Elite is a way of getting SMEs to think more broadly about what they're doing. SMEs don't have the time or the resources to think about strategic growth on a daily basis," says Welton.

According to Graeme Malcolm of M2 Lasers, which develops next-generation lasers, the programme is already working: "It has increased our awareness of different forms of funding and what needs to be done to prepare for each." Malcolm points out a company such as his would typically be bought out by a large international trade buyer once it had reached a certain size. "This programme allows us to think about how we can keep scaling up."

If Elite is successful, the most important impact for private equity would be a much welcome boost when it comes to the industry's wider image; buyout houses would hopefully no longer have to spend months or years courting smaller companies and educating them about the benefits of alternative investment.

Looking back to Italy, the programme has supported 130 companies to date with several having raised private investment, others considering a listing and many exploring mini-bonds or private equity investment, proving the wide reach of Elite – this is not simply an IPO preparation programme.

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