Why embracing equity finance is key to the success of Britain’s Mittelstand
The column inches dedicated to the FTSE 100 recently reaching all-time highs are a disappointing reminder of the imbalance between the perception and reality of the UK economy. Indeed, a recent report confirmed what we at ECI have known for some time: the real engine of growth in the UK is the middle market.
According to BDO research, this sector (representing businesses with a typical turnover of between £10m and £300m) generates revenues of almost £1.4 trillion a year; employs 9.3m people across the UK; and has boasted growth of 33 per cent over the last five years. On all three metrics, our mid-market beat Germany’s fabled Mittelstand. It’s a story that we at ECI are familiar with, as sales and headcount across our portfolio of mid-market companies posted double-digit growth in 2014.
The same BDO report also argued for more government support for mid-sized companies, in the form of simpler and fairer taxes, something no business owner would disagree with. Yet while we understand the clamour for more help (and that the current political environment encourages promises like the government’s £1bn “Help to Grow” scheme), what this sector really wants is a period of stable policy-making.
What we don’t need is any further tinkering with the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme, Entrepreneurs’ Relief, interest deductibility – basically all the various programmes put in place by successive governments to encourage equity investment in SMEs, and to support high growth businesses and their founders. Changing well-established policies – or even suggesting that they may be changed, as some politicians have done – creates uncertainty and dissuades investment.
The biggest issue we see is that too few business owners will consider taking equity finance: indeed, a 2013 report by the CBI showed that just 3 per cent of UK SMEs tapped this source of funding. I am convinced that, if we can increase this number, we will grow Britain’s mid-market sector, and in doing so create even more jobs and wealth for the country.
However, we must start by asking ourselves why it is that so few companies consider taking equity investment. After all, it is a much more supportive, added value, long-term and stable method of finance than debt. I believe many entrepreneurs are fearful that giving up equity means giving up control. We need to do better to eliminate this common misconception.
Equity investment from sophisticated angel investors, venture capitalists or mid-market private equity firms is much more than just providing cash. It is about creating a partnership. Private equity investors provide management expertise, networks, and industry experience: advice on how to grow internationally, whether to pursue an organic growth strategy or opt for a bolt-on acquisition. Most importantly, equity finance doesn’t have to mean losing control.
Minority investments are an excellent way for founders to realise some of their company’s value, while still remaining at the helm. ECI has successfully adopted this strategy many times over our four decades of investing. A good recent example is Clarke Energy, where we are working with founder Jim Clarke to grow sales of his combined heat and power turbines around the world, and are helping with acquisitions in Australia, Bangladesh and South Africa.
The bottom line is that, after the worst financial crisis and recession since the Second World War, we all have a stake in anchoring the economic recovery on solid foundations. That means helping to expand Britain’s growing army of mid-sized companies across all sectors, including manufacturing, retail, healthcare, technology and business services. It also means encouraging an “equity culture” to help nurture that growth.