Rupert Murdoch owes Vince Cable a debt of gratitude. The former Business Secretary was embarrassed in those early days of coalition government after being suckered into telling undercover journalists he had “declared war” on the media magnate, but one of Mr Cable’s earliest initiatives in his post has just handed News Corporation a fantastic opportunity.
Last week Mr Murdoch’s company said it had bought the video advertising technology pioneer Unruly Media for £114m. It’s hardly a mega-deal for a company that in the midst of its run-in with Mr Cable bid £7.8bn for the 60 per cent of BSkyB it didn’t own, but this is a landmark deal. A business rooted in old media has acquired one of the hottest properties in video and social technology, for Unruly is one of the small number of world-class companies to have emerged from London’s Tech City scene (its annual revenues are £30m plus).
Just as importantly, this is the first disposal by the Business Growth Fund (BGF), the bank-financed but state-backed private equity fund that Mr Cable set up in his first few days in office.
In 2011, the BGF, launched with £2.5bn from high-street banks, was criticised as a figleaf to spare the blushes of banks that were refusing to lend to small and medium-sized enterprises. Others worried that the BGF represented a return to the days when the state tried to pick private-sector winners. The rest of the private equity and venture capital industry fretted that the BGF would provide unwelcome competition, cherry-picking the best investments.
Four years later, those fears look unfounded. For one thing, the fund was given a mandate to invest between £2m and £10m in the businesses it backed, relatively small investments compared to the private equity houses. Moreover, it has been run at arm’s length from the Government and the banks, sourcing deals through a regional network of financiers, accountants and other agents. The BGF also takes minority stakes in the businesses in which it invests, rather than taking control. Sometimes, it invests alongside other partners – as in the case of Unruly, where it was one of three investors – but in other cases it is the only backer. Either way, it sticks to minority stakes.
For many entrepreneurs, that is hugely attractive. Young businesses often find that equity funding is required to take the business to the next stage, but their founders are reluctant to give up control of the ventures they have built from nothing.
For all these reasons, BGF has proved popular with growing businesses. After a slow start – Unruly was just one of a handful of investments made by the fund in its first year – the pace quickened. Today, the fund’s portfolio includes almost 100 businesses, representing most economic sectors and every region of the country.
The BGF’s governance structures have enabled it to operate a little differently to private equity, which depends on rapid turnover. While the typical private equity fund might expect to hold a business for five years or so, the BGF is able to take a longer-term perspective, though it is open to offers, as in the case of Unruly.
The biggest achievement of Mr Cable’s initiative, however, may be to re-establish the idea of growth capital as a mainstream option for small and medium-sized businesses looking to grow. The banks themselves walked away from this type of investment years ago, while it is fair to say the private equity sector comes with a little baggage. Equity investment, however, has an enormous amount going for it, for both sides, as BGF is now beginning to prove.
How unpaid bills can be an asset
Late payments continue to dog smaller enterprises, with research suggesting the total value of unpaid invoices is 8 per cent higher than a year ago. The Asset Based Finance Association says SMEs are owed £64.7bn in unpaid invoices, up from £62.5bn last year – and 36 per cent above the total for 2011.
The trade association’s members offer invoice finance, which enables businesses to borrow against the money they are owed. Jeff Longhurst, its chief executive, said that as the late payments problem persists, many businesses would need to start thinking of unpaid invoices as an asset. “In many cases, these are the most valuable assets an SME has, and they can be the key to unlocking critical and affordable funding,” Mr Longhurst argued.
Pioneers benefit from EU funds
Eight British businesses are to share in a funding windfall worth almost £15m, courtesy of a little-known European Union scheme launched last October. The businesses will each receive EU funding of £1.8m from the SME Instrument, a scheme designed to help small and medium-sized enterprises commercialise new ideas. British businesses have so far picked up 37 such grants, more than any other country except Spain. Recipients include Q-Bot, a robotics firm, Fianium, a specialist in lasers for industry and the medical sector, and Avanticell Science, which is developing 3D printing technologies.