Readers of the financial pages over the past few weeks may be surprised to
learn that there is any financing available for businesses at the moment.
When big investment banks collapse or are sold for a fraction of their
former value, the reasonable assumption might be that it’s not the time to
seek funding for your business.
But Scottish firms can take heart from the fact that not only are some areas
of the country thriving while the rest of the UK is struggling, there is a
strong tradition in the Scottish business community of private investment in
local firms. The investment activity report from the British Private Equity
and Venture Capital Association shows that Scotland had the biggest
percentage rise in 2007, up 126% from £174m to £393m, and attracted 3% of
all UK investment.
The Aberdeen region, with its wide range of oil and gas industries, is
enjoying a boom thanks to high energy prices world-wide, but other sectors
are doing well, too. Neil Ross, head of the Scottish Venture Fund, which
provides business financing up to £2m in partnership with the private
sector, says that its investments are likely to be up at least 30% this year
compared with 2007-08.
“We are involved in about 60% of investment deals in Scotland,” Ross says, “so
we see a lot of what is happening in the market here. Investment activity is
significantly up on last year, which is surprising to many people.”
The fund, set up by Scottish Enterprise with the Scottish government, has
backed deals in sectors such as IT, software and life sciences as well as
more traditional Scots businesses. It works with venture capital or private
equity investors such as Braveheart Investment Group, one of Scotland’s
leading “angel” investment houses.
Braveheart, founded in 1997, invests in the early stages of a business, right
at the “sharp end”, as Geoffrey Thomson, chief executive, puts it, until a
sale or an initial public offering (IPO). Its successes include the
Edinburgh microelectronics company Wolfson.
“There is a lot of venture capital money out there, but it is hard to get,”
Thomson says. “There’s a lot of competition and a lot of valuations have
come down. But while there is a tightening of belts, there are still good
deals to be had. And because Scotland is buoyant in the business angels
sector – everyone knows each other – entrepreneurs have probably got the
best chance of raising angel finance here.”
Businesses that want to stay ahead of the competition must get right a range
of different elements, he advises: “You need to have the right management
team, the right product, the right financial structure – and you have got to
be in the right place at the right time. It’s not enough just to have the
right product, for example.”
Calum Paterson, managing partner of Scottish Equity Partners (SEP), a venture
capital group, says it is a difficult climate for businesses large and
small: “The credit crunch is undoubtedly making it harder for companies to
obtain capital in general as lenders batten down the hatches.” While SEP is
being prudent, it is seeking investment opportunities, particularly Scottish
technology business. “Four of our nine new investments in the past 12 months
were companies based in Scotland, and the deal pipeline looks healthy,”
Paterson says.
Thomson adds a warning that raising funds may take longer than it used to:
“Liquidity is a problem when there are very few IPOs happening, and
investors are nursing their losses on the stock market, so they tend not to
sell up to realise capital to invest.”
Marc Ligertwood, of the private equity house Dunedin Capital, says investors
are looking to back management teams that show aggression and ambition but
also a hefty dose of reality. “We encourage people to be realistic,” he
says. “If you are overoptimistic in your growth forecasts, then you’ll scare
off investors.”
Businesses would be wise to get good investors on their board or shareholder
register, Ligertwood suggests. “Many companies are reviewing what they
already have and not looking to make new investments. If you have the right
people already on board, then they can help you to raise finances and
support the business.”
Donald Kerr, head of commercial business, Scotland, for Bank of Scotland
Corporate, says that the pressures on the banking sector are impacting on
the wider corporate economy. “Scottish business has grown this year in terms
of financing and the customers we’ve helped, but we continue to be
cautiously selective,” he says.
“While Aberdeen continues to benefit from high energy prices, and businesses
such as public transport and waste are also doing well, it is taking longer
for deals to get done.
“Banks are taking a cautious approach to new lending proposals, and businesses
have to expect longer due diligence and to make sure that they have factored
absolutely everything into their business plans. More than anything,
companies have got to show that they understand their markets and keep in
touch with their customer bases.”
Ligertwood also emphasises that businesses have got to work harder: “It is
just not enough to pursue a strategy of more of the same of what you have
previously done to grow the company. You have got to look at other areas to
develop and consider which are your more profitable areas. In this climate,
a lot more soul-searching and real analysis is needed.”
Entrepreneurs looking to Bank of Scotland Corporate for support during these
tough times may wonder what help they can expect. “While times are
challenging, our commitment to entrepreneurs stands firm,” says Kerr, citing
the bank’s continued involvement in the Entrepreneur Challenge as well as
its part in the £560m American acquisitions by Clyde Blowers, the
engineering firm run by the entrepreneur Jim McColl.
“We’ve continued to grow our Scottish book this year, both in value and number
of deals, and are continuing to do our bit to support Scottish businesses,”
Kerr says. “The trick for us is to keep our eyes on the day-to-day stuff and
not get distracted by what is in the newspapers. We’re the long-term player
here and are working with our existing partners to make sure we get through
this and come out stronger on the other side.”
INVESTMENT FINANCE
Scottish Enterprise helps companies to develop through the Scottish Seed Fund,
which provides equity and loans from £20,000 to £100,000 to early-stage
businesses; the Scottish Co-investment Fund, a £72m equity investment fund
partly financed by the European Regional Development Fund; and the Scottish
Venture Fund, set up with the Scottish government to invest £500,000-£2m in
company finance deals totalling between £2m and £10m. See www.scottish-enterprise.com
Scottish Enterprise also awards grants, including regional selective
assistance for firms that create jobs in certain parts of the country, and
through Smart: Scotland, which helps to fund small and medium-sized
technology enterprises with fewer than 250 employees and annual turnover
less than €50,000 (£40,000). Visit www.scottishbusinessgrants.gov.uk
Business Gateway (www.bgateway.com ) can
help growing Scottish companies find financial backing
The National Endowment for Science, Technology and the Arts invests in
business innovation, directly and through third parties. For details, visit www.nesta.org.uk
Information on venture capitalists and business angels is available from Linc
Scotland (www.lincscot.co.uk ) and
the British Private Equity and Venture Capital Association (www.bvca.co.uk
)
MORE GRANTS WANTED
While running a company owned by its employees has advantages, it can make
things difficult when trying to raise finance. “Being employee-owned is a
great way to anchor the business in the local community and is great for our
staff,” says Bruce Davidson, 51,right, managing director of Loch Fyne
Oysters, based in Cairndow, Argyll.
“But it does mean that when looking to raise capital investment we are rather
limited to conventional bank borrowings, which can be short-term and
expensive.”
The seafood firm has received grants from Scottish Enterprise but the recent
acquisition of Simson’s Fisheries had to be financed through a bank because
Simson’s is located in England. Davidson wants to persuade the relevant
government bodies that such investments benefit Loch Fyne’s roots and should
qualify for Scottish grants. Another possible route for the business is to
consider issuing a second tier of shares to attract investment.
