Beechbrook launches UK SME-focused credit fund

Alice Murray
20 July 2015

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Beechbrook Capital has launched a new credit fund, focused on UK SMEs and aiming to raise between ТЃ100-200m. Alice Murray speaks to Beechbrook managing partner Paul Shea about the new vehicle

Beechbrook Capital recently launched Beechbrook Capital UK SME Credit Fund, a non-bank credit fund for sponsorless SMEs. According to the specialist fund manager, the new vehicle was created off the back of high demand from accountants, solicitors and corporate finance advisers for this type of funding.

The vehicle will look to invest in UK small and medium-sized businesses turning over between £5-50m. The fund will predominantly target senior secured loans in non-private-equity-backed companies.

According to Paul Shea, managing partner at Beechbrook (pictured), the new fund is a natural evolution for the firm: "Our existing funds focus on providing mezzanine to private equity-backed buyouts in northern European lower-mid and mid-market companies. So we have already been lending into the UK market through sponsored deals.

"But over time, as our brand has grown, and as market dynamics have developed, we have been receiving requests for this kind of financing for a while, and that has strengthened recently. We have been receiving requests from non-private-equity-backed companies that are high-quality, good UK SMEs. We have had to turn this demand down because it doesn't fit in with our existing mandate – these companies are looking for senior debt, and they're not private-equity-backed."

The bigger picture
Outside of inbound requests for this type of financing, Shea believes the macro conditions are also favourable: "From a macro point of view, the UK banking sector is now highly consolidated. The banks are now heavily regulated and net bank lending to SMEs has been static at best. Yet, we're in a healthy environment, but we haven't seen an increase in lending. So demand for this type of fund makes sense on a macro view, and matches with what we're hearing on a day-to-day basis."

According to Shea, the newly launched fund already has a healthy pipeline thanks to Beechbrook's current investments: "Independent directors that sit on the boards of our existing portfolio companies often sit on other company boards, which are in need of this type of financing. These introductions combined with our various regional contacts mean our pipeline is already decent."

Beechbrook will approach existing and new investors to commit to the new vehicle. Says Shea: "We will be speaking to our existing investors as well as looking to expand our investor base. This is a senior unitranche product and therefore offering different returns to our current funds. As a senior unitranche fund it will be lower risk with an attractive yield. This is likely to be most attractive to pension funds and insurance funds that need to meet liabilities."

Enough to go round
Shea does not believe this fund will compete with traditional private equity investors; rather, it will be a complementary addition to the financing mix. "According to ONS figures, there are around 40,000 UK companies with turnover of between £5-50m, so the sheer scale of the opportunity means we are unlikely to come up against private equity," says Shea.

"Furthermore, this is a very different product; we're offering senior debt as a lender, not equity for transforming a business. It is more likely that this fund will benefit private equity. For example, if management teams are looking to buy private equity owners out, this product could support them in doing that, and provide an exit for private-equity backers.

"And similarly, if a company has £4-5m EBITDA and no debt, it might be too early for private equity to invest, so instead we can finance that early growth in preparation for potential private equity involvement."

The new fund has also seen Beechbrook expand its team with two senior hires. Jon Herbert has joined the company as managing director of the new fund; he has also taken a seat on the investment committee. Herbert was previously director at LDC and prior to that head of Lloyds Acquisition Finance.

Furthermore, Jon Penfold has joined the Beechbrook advisory board. Penfold previously spent 16 years at RBS, focusing on SME loans and equity investments. Prior to that, he spent four years at 3i.