Is there a crisis in growth financing?

(By Philip Carnelley, 4 Nov 09, 11.30) Together with a good number of HotViews readers, we attended a Knowledge Peers event on the issue “Is there a crisis in growth financing?” (see Prestige networking event for growth company directors). Speakers/panellists included successful entrepreneurs Ian Gott of BPM company Nimbus and John O’Connell (who readers will know well), plus Andrew Garside of ISIS Equity Partners and Robert Donaldson of Baker Tilly.

The panellists generally agreed that “crisis” was an overstatement, but that things were tough. Banks are generally only lending to large clients and have tightened terms dramatically – to the extent that PE financing can be cheaper. The plethora of Government schemes were felt to be of limited use. However, contrary to what may be thought, PE firms (there are over 200 in the UK) still have a considerable amount of money to invest. But, they want to lend on the right terms, and the lack of bank finance is a considerable hindrance. In an interesting development therefore, PE firms are starting to fund "whole deals" because of the absence of gearing. That means they have to accept a blended return, as they are supplying both the debt and the equity. It was generally agreed that PE financing is an expensive way to finance a business – but may be the right or indeed the only way. Meantime the public markets are closed ‘except to the biggest.’

The most contentious issue debated was whether PE firms are too narrow in their expectations. Several attendees thought that PE firms are falling short, in three ways: by being reluctant to back companies run by non-middle-class professional men (there was some consensus on this); by insisting on unreasonable terms (this was hotly contested); and by always expecting owners to trade control for growth funding.

PE firms, attendees said, need to recognize that entrepreneurs “come in all shapes and sizes.” But it was pointed out, private equity is finding returns are minimal, and risks high; while many owners have unrealistic expectations of their worth, a considerable barrier to deal-making. Also owners often do not look hard enough at the cultural fit with potential backers before signing a deal.

To conclude, we leave you with a thought from Robert Donaldson: reviewing the current situation, he said that entrepreneurs needing funding need to get used to the current conditions: for to a large degree, they are here to stay: “This is the new normality – the age of equity.”