Small firms plagued by debt void
In the US, business development companies were created in 1980 as a form of publicly traded private equity. BDC funds are open to small investors and provide capital to start-up and venture capital-type opportunities.
Not surprisingly, the large private equity firms are active in the BDC sector, with Apollo, Ares Capital and BlackRock Kelso Capital and Kohlberg Capital all running funds.
There is, so far, no equivalent of the BDC in Europe. But there are certainly signs that private equity firms in the region are looking closely at the smaller end of the market. The Riverside Company is a private equity investor focused on companies with an enterprise value of less than €200 million. In the UK the firm is targeting SMEs looking for expansion capital globally. “There are companies out there looking for smart capital,” partner Trey Vincent says. “I have been impressed by the number of very strong management teams that are bucking the trend,” he says. “Exceptional companies can fund – ordinary companies can’t.” Vincent explains that these firms are below the radar of most non-bank lenders, which want to do deals between £100 million and £200 million. He therefore reckons that this is an area ripe with opportunity for private equity. “It is still more talk than action but a handful of players will come to the market,” he predicts.
The dearth of debt finance at the very small end of the UK market is acute, and has driven government plans for a £1 billion government-backed UK business bank to address the “longstanding, structural gaps in the supply of finance” that were identified in the Breedon Report. Given that the taskforce for this report was charged with identifying non-bank, alternative forms of debt finance for small enterprises it is telling that the solution being proposed is... lending from a state-supported bank. It looks like an indictment of initiatives such as Project Merlin and Funding for Lending. “New companies or those wanting second-round funding are finding it very hard,” John Williams, managing partner at Kuber Ventures, tells Euromoney. Kuber Ventures is a private equity-backed firm that specializes in investing in Enterprise Investment Scheme (EIS) portfolios. It launched the first EIS multi-manager platform last December. The EIS offers tax incentives for investment in corporates with a balance sheet no greater than £15 million and with no more than 250 employees. It offers income tax relief at 30%, tax-free gains, full inheritance tax relief and the rollover of existing capital gains. The scheme was aunched in 1994 and its terms were changed in April 2012 to increase the size of company eligible for relief, increase the maximum investment to £1 million a year and introduce greater incentives for investment in seed capital for start-up companies.
“It is early days for Funding for Lending, but the returns so far have been disappointing,” says Williams, a veteran of wealth management at UBS, Barclays and Credit Suisse. He describes the lack of commercial funding to small businesses as the “elephant in the room” that is stifling growth in the UK economy and views a business bank as a welcome development, emphasizing that “there is a complete void in the market on the debt side”.