Last year saw the controversial BGF graduate from start-up to a true member of the lower mid-market space. 2013 will be about accelerating its investment pace and targeting bigger companies. Kimberly Romaine tracks the investor’s progress
Nearly two years after launch, the BGF has certainly left its mark on the UK's lower-mid-market. In its first 21 months, it backed 24 businesses across 17 sectors, deploying £120m. This has been done through BGF's seven offices across the UK, with more than 70 people employed – more than half of which are front-line investors.
Activity in the last year has moved at pace, with one notable development including the launch of BGF's Talent Network – a pool of internally sourced NXDs. This should be helpful in assisting BGF's new head of portfolio, John Swarbrick, to support the investee businesses – he is tasked with assessing the amount of time and support each will need and then allocating resources, either internally or externally, to ensure BGF can add value. Having spent 15 years with LDC, Swarbrick now curiously continues to divide his time between the two firms, though intends to be full-time with BGF by the end of the year.
Perhaps the most impressive progress has been on the PR front, with frequent and brash negativity at launch – both from industry players as well as the press – now reduced to occasional whispers (and often, your correspondent has noticed, from firms that have lost out to BGF in a process).
unquote" reviews the BGF's effect on the UK market two years after its launch
While this is all impressive, there are some goalposts that have been missed. For example, a year ago BGF told unquote" it aimed to have 100 professionals by the end of 2012, nearly 50% more than they currently have. Another goalpost may have moved, according to some cynics who suggest BGF is indeed using debt. For example a recent £3.25m injection into Scottish oil services business Aubin saw a £500,000 loan facility from Bank of Scotland from the government's Funding for Lending scheme. Some of the aforementioned whispers suggest BGF have used leverage more widely, though typically after a deal is done so that it remains below the radar. BGF defends its position, maintaining they may invest alongside new debt facilities, but do not leverage per se. There are a number of other examples where the company has taken on new debt facilities in addition to, and simultaneous with, BGF growth-cap, as BGF CEO Stephen Welton (pictured), explains. "This is indicative of how we can work in partnership with banks to help unlock more credit for SMEs," says Welton, stressing BGF is not strictly putting in debt.
Finally – though admittedly not a moved goalpost – BGF's portfolio is heavily biased toward the lower end of its remit. While BGF is formally tasked with investing £2-10m of growth capital for minority stakes in businesses with revenues of £10-100m per annum, roughly 90% of its current portfolio turns over less than £20m. Says Welton: "We will seek to balance this in 2013, not by reducing this segment of the market, but by more actively targeting larger companies."
The current bias may be partly because of BGF's £30,000 investment in the Business Angels Association (BAA) – the relationship effectively helps BGF "de-risk" smaller businesses by monitoring them closely for years prior to investment while they're backed by angels. And so far, half a dozen of BGF's investments have been done with angels. As a result of its close business-angel ties, BGF has backed business with revenues of as low as £5m – Aubin, for example, generated £5m in 2012 and Celaton, a January deal, generated just £2.2m.
What it's done well
BGF maintains its ambition to back 30-40 businesses per annum from 2013, and is making an effort to streamline its diligence to make this achievable. Last year, Welton told unquote" it took three months to go from initial conversation to a completed deal. Indeed, a legal adviser to one of the BGF deals commented BGF was very much in a "teething stage" regarding the legal process. Today, BGF believes it takes 2-3 months to complete a deal, so an improvement: 4-6 weeks to agree heads of terms and another 4-6 weeks to complete. BGF is striving to improve further, says Welton: "We have completed some investments in four weeks – it is the gold standard to which we aspire and something that we will address head on as it is a major hidden barrier to more companies seeking investment."
Within BGF's current portfolio, 14 chairmen and four NXDs have been appointed by BGF. One example is casual Mexican restaurant chain Barburrito, which BGF backed in March 2012 to the tune of £3.25m. The firm opened its first site in February and now has seven, with an eighth scheduled to open in May. BGF introduced Colin Hughes as a new chairman, of Eat and Pret pedigree, as well as a new financial controller and HR manager. The firm anticipates creating 250 jobs.
BGF aims to invest £200m in 30-40 businesses this year. It is well on its way, with five businesses backed in the first two months of the year and BGF currently in discussions with around 50 more. And while many bemoaned the six months it took BGF to do its first deal, the flip side of that is that the two dozen deals already clocked up have actually been done in just 15 months. True private equity success is measured not by money put to work, but proceeds generated therefrom. It is clearly too early for BGF to have any exits under its belt, but it is believed to have had approaches for at least two of its businesses.
With success comes challenges, says Swarbrick: "At the current investment pace, BGF will soon have more than 150 portfolio companies, which need to be properly supported." The BGF's Talent Network is earmarked precisely for this. And as businesses ripen, BGF will have to suss out lucrative exits. This could be facilitated by BGF's network via its connections to the UK mid-market through the backgrounds of its 70+ people. Swarbrick's former house LDC is likely the strongest link: with a common shareholder in Lloyds, similar regional footprint, at least three ex-LDC executives now with BGF and LDC's "blessing" in Swarbrick's straddle-cum-move to BGF, it is reasonable to expect some off-market deals could be in the works.
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