Stephen Campbell on the Growth Capital Market

2014 – What is in store for the UK growth capital market?

“We think 2014 will be the year of the exit, which is good news because exits are the heartbeat of our industry: they increase the speed at which money flows round the system, benefiting everyone – funds, accountants, lawyers, listing brokers, management and even PR advisers.”

“The re-emergence of the Alternative Investment Market as a viable exit route, particularly for fast growth businesses, will encourage greater investment by funds in these types of companies.”

The general election is set for the first half of 2015. Will this have an impact on the market next year? What factors might influence activity?

“The build-up to the general election will affect our industry because it is likely to prompt closer scrutiny of investment practices – that may result in pressure for further regulation and oversight of the finance sector. For example, the current focus, quite rightly, on some banks’ treatment of SME customers is bound to lead for more calls for responsible investment practices.”

“In the short term, the Scottish independence referendum will result in some background noise but so far we have not seen any anxiety or concerns from either our portfolio companies or our investors. As a pan-UK investor, we do not expect the referendum to have any effect on our business.”

Where will the opportunities lie? Key sectors/regions of opportunity and why?

“As the economy comes out of recession, companies start overtrading. That’s where we see our opportunities lying – in good businesses that can’t service the rising demand for their goods and services with their present capital structure. In particular, we can step in where the banks won’t help.”

Do you see a trend for any particular kind/structure of deal – e.g. MBIs and why?

“MBIs have become viable once again after being completely out of favour. Debt funding has finally become available once more and we have seen a number of good backable candidates who are looking for businesses to buy.”

“MBOs are on the increase as rising house prices have given managers the means with which they can contemplate buying a stake in their businesses. We expect this trend to accelerate as larger companies look to divest non-core activities.”

What will the fundraising environment be like?

“The British Venture Capital Association says private equity funds raised an average of £28.5bn a year over the four years from 2005 to 2008, but in the whole of the four years that followed the total amount raised was just £20bn – an average of £5bn a year, which is 82 per cent down.

“Private equity funds that raised money during the boom period that ended in 2008 will now have finished investing the money, or be reaching the end of their five-year investment cycle. Demand for these funds is rising once more and the debt markets will not be able to fill that void, so this strongly suggests that fundraising will pick up again. And if, as we expect, there are more exits in 2014, this will also boost fundraising.”

What about the exit environment?

“Large companies are holding historically high levels of cash – one recent US Fed study showed companies were holding 12 per cent of assets in cash against a long run average of 6 per cent. Meanwhile, organic growth is still patchy and cost cutting has reached the point where there is nothing left to cut. All of this points to a great market for exits in the coming year.

“The growing understanding of the potential benefits of the UK’s Patent Box Regime, which offers very valuable tax concessions, will increase foreign interest in buying UK companies.”

Mindset of UK entrepreneurs – what are they most concerned about? Attitude to equity investment?

“The UK’s entrepreneurs continue to be cautious about diluting their own equity, but as opportunities that require capital present themselves, they generally have to make a judgement – do they avoid dilution and miss out on the opportunity or accept the investment and hope that the opportunity means they end up with a smaller stake in a much bigger business? As economic confidence grows this decision becomes easier.”

Is there any expected regulatory change that will impact your business?

“The renewables sector is one which we invest in and what is really needed there is a period of stability. If 2014 proves to be a year of limited regulatory change and consistency on policy, it would greatly help this industry.”

What would you call on Government to do to support investment into SMEs?

“Easing the administrative burden on SMEs is of paramount importance: for example, by making it easier to hire staff, or even incentivising companies to do this, the Government would create a significant economic boost.”

How is Panoramic placed for 2014? What’s in store for your portfolio companies?

“We are very excited about the opportunities that 2014 holds. We have two portfolio companies very likely to exit in 2014 at impressive multiples. The demand for our brand of responsible, involved SME equity financing will only grow in the months ahead as companies start thinking again about growth opportunities. We see an environment where companies are looking to thrive, rather than simply to survive as has been the prevailing mood over the last few years.”