On the day that Mervyn King, the governor of the Bank of England, warned it
was “likely that the UK economy is entering a recession”, BBC News took some
economic snapshots of the regions. The one bright spot was Newcastle upon
Tyne, where an engineering firm was taking on more staff.
No two recessions are quite alike and, according to David Hall, managing
director of private equity at Leeds-based investment company YFM, the
downturn of 1991 offers few precedents for understanding the current
economic climate. “Last time, it had to do with a lack of consumer demand so
it began in the retail sector and worked its way through,” he says. “This
time it is to do with an absence of credit – and also a problem in the
financial system itself – so the sector hit first was the one that accessed
the most credit: the construction industry.”
Entrepreneurs are reacting in two ways, says Hall. “The analytical,
ex-corporate managers tend to be more cautious than the
grew-it-from-my-own-bootstraps entrepreneur. The latter are saying, ‘Now is
the time I am going to get the biggest increase in value from taking the
right decisions. If I can get a bit more investment in the business, either
in terms of people or capital, I can steal a march on the competition – and
that march will be worth a great deal more than if I had done it at other
times’.”
But where to turn for that “bit more investment”? “Whether it’s medium to
long-term loans or pure overdraft, banks are going back to customers and
saying they’d like to reprice loans – usually upwards,” says Maxine Pott,
corporate finance partner at Newcastle-based accountant RMT. “Even though
the base rate is going down, I suspect the cost of funds for banks is going
up.”
Tim Pryor, head of commercial business northeast at Bank of Scotland
Corporate, says: “The terms on which banks are advancing funds to customers
reflect the fact that the cost of borrowing has increased for the banks.
This is the situation for all entrepreneurs seeking funding – but we know
good businesses will still prosper.”
Pryor goes on to say that in any downturn “there will be entrepreneurs with
good ideas – and we are committed to supporting those businesses. Generally
speaking, it’s going to be tougher because banks are going to apply a higher
level of scrutiny. So persevere, but make sure when you present your case
that you’re sure of your own assessments”.
At the regional development agencies (RDAs) in both the northeast and
Yorkshire and Humber – which make up the Bank of Scotland Corporate
Entrepreneur Challenge’s northeast region – there is an air of optimism.
Since the 1980s the business landscape these agencies preside over has
changed dramatically: big employers such as shipbuilding, iron and steel and
coal-mining have given way to masses of small and medium-sized enterprises
(SMEs) involved in media, information and communications technology and
tourism. Manufacturing and engineering have evolved and found new strengths,
as has the oil and gas industry.
The RDAs argue that they have in place the strategies to enable entrepreneurs
to access the finance they need – and the better these mechanisms work, the
closer the regions will come to fulfilling their economic targets. (Both
agencies are also likely to benefit from additional funding from Europe
within the next two years.) In the northeast, GVA (gross value added, a
measure of income generated by economic activity) has risen from 79% of the
national average to 81.5%, according to the latest figures from the Office
for National Statistics.
“We feel the good work that’s been happening between the public and private
sectors is starting to pay dividends,” says Malcolm Page, chief executive of
the RDA One NorthEast. “We’ve seen real progress and are keeping our eye on
our long-term goal of getting GVA to 90% of the national average by 2016.”
The next few years, the RDAs concede, may be tough but many lessons have been
learnt over the past two decades: the public-private partnership has come of
age and can be made to work to the advantage of the regions’ owner-managed
businesses.
“In the past, the public sector hasn’t really cared about SMEs,” says Alex
McWhirter, assistant director of enterprise at the Yorkshire and Humber RDA,
Yorkshire Forward. “I want the business community to understand that you
don’t have to be a certain size before we care about what you are doing.
Whatever the sector, we want to strengthen our business support – not for
altruistic reasons but because we like people to make money.”
McWhirter clearly has little patience with entrepreneurs reluctant to turn to
private investors for fear of “losing control” of their business. “People
say, ‘I don’t want to give away my business’,” he says. “My response is:
understand what you’ve just done. You’ve sold part of your business to
someone else and by selling it you have got a huge tranche of cash coming
into the business. And if you have chosen your equity partner correctly,
you’ve got someone who is going to work with you to make the business a
success.”
Jo Lennon, marketing manager at Newcastle-based Entrust, which advises SMEs
and links entrepreneurs with business angels, says many enterprises in the
region are less than 10 years old, so economic downturn is a novel
experience. “We are definitely not telling businesses to batten down the
hatches. Once they do that, they become blinkered to opportunities.
“For our clients – our investors– I’ve ranked our portfolios by sector,
exposure and performance. What we’ve found is that at the moment our 300-odd
investments break down into two distinct groups: those whose attitude is
‘Uncertainty is great, this is where I can make the most money’ and those
who are saying, ‘Oh, my god, what do I do?’
“It doesn't really matter which sector you are in, these businesses are about
individuals.”
TESTING TIMES
WHEN Stewart Regan, 44, joined Yorkshire County Cricket Club as chief
executive in 2006, its future hung in the balance. After plans to build a
new stand went awry in 2002, the club had all but collapsed financially.
Worse still, the club didn’t own its famous Headingley ground in Leeds.
Rescue came in the form of a new board, which included Colin Graves, founder
of the Costcutter supermarket chain (who took on some of the debt), and the
first steps were taken to rebuild the club as an enterprise.
By the time Regan was recruited from the Football League, the ground had been
acquired but the club was far from financially healthy. “It had £18m of debt
on its balance sheet and the future looked very precarious,” he says. On top
of that, the club was committed to improving its facilities.
Regan’s challenge was to find a way to fund improvements without taking on
more debt – and he found a solution through a partnership with Leeds
Metropolitan University, which realised that for many overseas students the
name Headingley is more of a draw than Leeds. The tie-up has resulted in
plans for an ingenious dual-use building, designed by the architect Will
Alsop, that will not only be a cricket pavilion housing state-of-the-art
media and player facilities but also operate as a teaching facility for the
university.
Having secured a £4m grant from Yorkshire Forward, the regional development
agency, on the basis of the importance of cricket to the area, Regan is
still £4m short of the sum he needs for work to begin later this year. But
he’s in discussion with three potential investors – and hopeful.
BACKING FOR BUSINESS
The regional development agency One NorthEast has a £10m pot set aside to
support businesses through the economic crisis. Finance is also available
via the North East Investment Fund, designed to plug the gap where small and
medium-sized firms don’t meet the criteria of traditional lenders, and the
North East Co Investment Fund, which matches funding from private investors
such as venture-capital firms. Grants are also available: see www.onenortheast.co.uk
Yorkshire Forward offers access to finance for research and development,
commercialisation of ideas and business growth. The RDA (www.yorkshire-forward.com)
also has capital grants available to support investment and job-creation
projects
Entrust (Tyne & Wear Enterprise Trust) operates a business angel network
and an equity-matching co-investment scheme (www.entrust.co.uk)
Leeds-based YFM Group provides venture capital, private equity investment
and business development services to businesses with an enterprise value of
between £2m and £20m. Manufacturing in Yorkshire and Humber is a current
focus. Visit www.yfmgroup.co.uk
The Yorkshire Association of Business Angels (www.yaba.org.uk)
links investors on the lookout for opportunities with entrepreneurs in the
region.
