07/11/2011

By Guy Rigby, Head of Entrepreneurs, Smith & Williamson

The recent launch of the Business Growth Fund (BGF) could be big and very welcome news for UK entrepreneurs. Many see it as a much-needed return to the availability of long-term growth capital, which hasn’t been seen by an entire generation of entrepreneurs.

The BGF is open to established, profitable, UK businesses with a turnover ranging from £5m to £50m and demonstrable growth potential. In return for £2m-10m of equity, the Fund will expect a minority stake of around 20%-40% of qualifying businesses and a board seat.

So how does the BGF stack up against traditional private equity investment?

The key difference is the longer-term approach to investment that the Fund will adopt, in contrast to the three to five year time horizon ending in a sale, typical of many private equity investors.

The BGF will work in partnership with business owners, supporting them with funding, expertise and through its business networks – but not necessarily with an early sale in mind. This may be more attractive to business owners who aren’t ready to plan their exit just yet.

To what extent the Fund will compete with existing private equity investors remains to be seen. It largely depends on whether there are enough businesses out there that meet the BGF’s qualifying criteria. Some private equity firms argue that the key issue is not a funding shortage – but the difficulty is finding suitable businesses that actually want funding and can generate the required levels of return. This is compounded by the ‘demonisation’ of private equity in the popular media, an unhelpful positioning for “Entrepreneur Britain” that Smith & Williamson is helping to address.

It may be easier then for the BGF to attract these types of businesses because it is committed to longer-term investment. The Fund is effectively adopting a more diversified portfolio approach to investments it believes will not under-perform in order to spread risk – betting on UK plc as a whole – as opposed to the more familiar, but potentially volatile stock-picking approach common to private equity firms. The Fund is unlikely to achieve the same stellar returns, but they may be steadier.

The BGF will take time to gain traction, as business owners, investors and advisers wait to see how it fares. A number of questions remain: most fundamentally, will the concept work? Will the BGF make money? What will the cultural relationship be like between the Fund and business owners? Will it have a rate-of-return horizon similar to those aimed at by private equity firms?

We will be following the BGF’s progress with great interest and bringing your regular reports. Watch this space.

For more information on the Business Growth Fund, visit www.businessgrowthfund.co.uk

Join us on
Follow @freshbusiness