As Europe’s football teams battle it out in Euro 2012, British companies are also facing a game of two halves. On one side, small companies are struggling to raise funds, with many reporting difficulty surviving the ongoing economic turmoil. But on the other, many well-run medium-sized businesses have had no problems raising money on the capital markets, particularly those in the UK and US.
These mid-sized companies – but only those that are growing – are being chased by banks and private equity funds that are keen to invest in them. However, these are exactly the businesses that do not need – or want – expensive bank or PE support.
But do not blame the banks, as they are in necessary transition. Businesses should be hopeful that once the banks have adjusted to new capital reserve requirements intended to help them cope with future economic turmoil, their strengthened position will attract the more progressive among them to come off the sidelines in search of fresh opportunities.
The issue is more complex than simply a question of accessing new funds. Many medium-sized businesses are currently struggling with growth and are only maintaining profitability through quite radical cost-cutting, which is unsustainable in the medium to long term. And, surprise, surprise, banks and private equity especially, are not really interested in the “very hard work” stories – of companies that have demonstrated passion and a record – that used to be their mainstay in the good times.
Well-intentioned politicians, from both Labour and the ruling coalition, have clearly sensed they need to do something, but when the financing push comes to bottom line shove they tend to deliver little more than window dressing.
The regional development agencies were not much help. Seen as risk averse, they tended to kill any application that made it through the deadly swamp of due diligence. It is easy, therefore, to become cynical and view any government-led initiative as no more than a political gesture driven by the need to be seen to be doing something.
London is beginning to lose its lustre as a centre for traditional funding and investment, and the only way back is to start accepting that risk capital is exactly that. The more mid-sized businesses that win backing, the better the chance that one will make the transition into a major league, FTSE 100 player.
As entrepreneurs and business owners – of companies of all sizes – we are all taught that when trying to raise funds, the plan is important but the people are vital. Those days are now long gone. Nearly all decisions are based solely upon the plan, with little reference to the sacrifice, relationships, record and drive of the individuals looking to secure backing.
There is a vicious – and dangerous – circle at play at the moment. The £150m-plus companies that are reporting stellar growth are being chased by all and sundry trying to invest in them, looking to provide capital or long-term loans. Those that are struggling for growth and need money to maintain it, are finding it very hard indeed to raise the necessary capital – unless it is at exorbitant rates or underwritten with potentially “life-threatening” guarantees.
The real problem for many mid-sized companies is that rapid growth is the preserve of very few businesses of this size; most are struggling to deliver even tiny incremental growth.
This means there is a huge shortage of capital, particularly at a time when applying for funds can be both expensive and time consuming as the due diligence can be nearly impossible to pass if you do not have growth. Access to capital is more difficult than it has ever been, an issue thrown into stark relief at a time when the economy needs it more than ever.
René Carayol is a writer and broadcaster on business and entrepreneurship