20/05/2011

Unusual and interesting times for a very important part of the angel market

By Modwenna Rees-Mogg, Founder & CEO of AngelNews

Spring is here, the sun is now shining more often than the clouds drop rain on our heads, but the wind can suddenly get a bit blowy making it feel more like January than April. At work it’s busy, very busy, but like the changeable weather, whilst the economy is clearly nothing like as bad as it has been, we are not yet in the long hot days of summer.

Angels are now the destination of choice for SMEs (small and medium enterprises) needing funding. And with demand comes supply, across the industry networks are reporting healthy growth in volumes of new angel investors. Meanwhile experienced angels have new challenges, partly responding to the increased demands for funding from potential investees, but also to requests from their existing ones for more cash to see them through. For some this is par for the course, but for others its because cash levels are getting close to critical because some one-off event has thrown the plan off course. All of a sudden that next round of funding becomes “turnaround finance” and has to be banked in a matter of weeks, not months; hence the rise of the turnaround angel as a new class of investor. And the increased demand for turnaround cash is creating an increased supply in angels, voluntarily or otherwise, becoming turnaround angels.

The world of angel turnaround investing is different to “normal” angel investing; a world where investments timescales intensify by a factor of 4 or more, where debt or convertible debt is as, or more, important than the vanilla equity in the deal, and where the role of the angel investor in relation to the management team is more important than ever.

It seems like a good time therefore to pick up with Nick Young of Beer & Young who we interviewed last year (see 1,000 Angels can't be wrong but syndicates need not apply). Nick sits in a particularly relevant part of the angel market for this stage of the economic cycle. His business focuses solely on arranging angel turnaround investments. As an individual, he is charming, intelligent and perhaps most of all acute to the threats and opportunities for businesses in turnaround mode. He has also just won the award as Business Rescue Funder of the Year at the Insolvency & Rescue Awards 2010 as well as the Commended Award for “Best Corporate Finance Boutique” at the Moneyfacts Awards 2011.

Whilst HMR&C and the banks have and are continuing to behave very responsibly this does not mean we are out of hot water. HMR&C does now want its money and whilst the banks are starting to lend again there is not necessarily enough money to clear up both past problems AND invest in the recovery. Experian reported that 10% fewer businesses failed in January this year (1,266, vs 1,426 in 2010), but there is a lot of trouble behind the scenes. When we chatted on the phone, Nick told me that his part of the market is “very busy indeed, at the moment.”

The turnaround market may appear to be a strange one for private investors to enter. 98% of chatter about the angel market is about backing new businesses to long term success, but I would be willing to bet that in any one angel portfolio, at the moment, up to half the investments are in a stressed financial situation; management teams are tired and need help. It’s these investments that are giving investors more reasons to develop a headache, than to drink champagne.

However, Nick told me that more and more angels are seeing the positives in developing skills as a turnaround investor. At this time, perhaps more than any other, the value added of a good angel investor tells; and the money proffered is ever more gratefully received. QED, I concluded, the Beer & Young list of angels is growing nicely, thank you very much (It’s now comfortably over 1,100, Nick verified to me).

Turnaround angels are generalist investors, not tending towards any particular sector and only avoiding property in any numbers. They are not necessarily after a pound of flesh; Nick told me that in half of the deals he closes the angel leaves the deal closing ceremony with a significant minority equity stake, but not control. There are no signs of a fashion developing in syndicates of turnaround angel investing; timescales simply do not permit it. This is still a land for the lone, seriously wealthy angel to claim, stumping up anything from £100,000 to £1m within 6-10 weeks. There is still competition though. Whilst the angels may invest alone, that does not mean that there is only one potential investor after the deal. Indeed the right business may find itself in the somewhat unusual situation (given the circumstances) of having to choose between 2, 3 or more offers on the table.

Why do angels do it, particularly given the potentially competitive nature of the transaction? Nick reminded me that turnaround investing gives angels the chance to make a difference as an integral part of the management team, enables them to buy into a fundamentally great business (with a track record of sales and profits to prove it) at a very low valuation and, last but not least, to get the satisfaction from saving a failing business. Surely three of the best reasons you can think of for being an investor at all.

And something that was revealed by some statistics that Nick sent me, but which is extremely interesting – the advisory fees charged by Beer & Young are no worse than you would expect from a typical angel investment. Beer & Young does not charge more just because timescales are tight.

Nick is out in the market on a daily basis trying to satisfy the appetite from his angels for more deal flow. If you are reading this and have an investment that needs some turnaround capital or are in a management team wondering how on earth you will make the numbers add up over the next few weeks, it may just be worth giving him a call to see if he can help. One thing I can be sure of, you will be welcomed with open arms, not cries of derision, by Nick and his team. And you can be sure that you will be in safe hands. Here is a quote from one of his satisfied customers.

“Beer & Young came to the rescue in the 11th Hour … our cash situation was critical and we only had about two months left before closing the doors. They worked round the clock to introduce us to several real investors from which we were offered not one but two deals – either of which we could have gone with. We survived because of their dedication and expertise and I am most grateful”.

And for those of you who “don’t quite want to make a call just yet”, check out the Beer & Young website which has a succinct and helpful guide to the world of turnaround: www.beerandyoung.com

You can reach Nick on 0207 329 6886 or email him at nick.young@beerandyoung.com anytime.

If you’d like to meet some of the AngelNews team and find out more about what we do, why don’t you come along to one of our next event? We run a popular series of events nationwide called Pitching for Management™ where exciting growth companies pitch to a room of senior executive talent to join their teams. Upcoming locations in May and June include Bristol, Middlesbrough, Cambridge, Oxford, Camberley and London. Book your tickets online at AngelNews Eventbrite.


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