Bridging the equity gap has always been a problem for small quoted companies.

Their difficulties in finding money for expansion have worsened since the global financial crisis. The mere trickle of flotations over the past couple of years bears witness to the almost total closure of the equity route. At the same time the banks, in spite of encouragement from the government, remain reluctant to lend.

Such circumstances dictate imaginative thinking by boards. But there is also plenty of room for investors to adjust their approach. They should always bear in mind that small companies are hardest hit in a recession, but they also have the capacity to bounce back faster.

TEG Group, the Aim-quoted specialist in composting technology, has in the past three months attracted two unusual investors that look set to put the company on a steady growth course. Both are backing a public company for the first time, so TEG’s experience might provide an indication as to how boards can make progress in a tough climate.

The company has developed a method of processing plant and food waste in large vessels in order to produce fertilising compost. It has been both selling the technology and operating four of its own plants across the country.

This week it announced a jump in revenues for the first half to June 30 from £4.5m to £8.8m. The underlying loss was halved to £391,000 and it made underlying earnings before interest, tax, depreciation and amortisation of £461,000, compared with a previous loss of £273,000.

However, the figures give little indication of the potential upside following the transformational deals concluded in June and July. The first was the acquisition of Simpro, which owns six composting sites in the Midlands; the second was a joint venture to build its first anaerobic digestion plant in Perthshire.

The addition of the Simpro sites takes the company’s processing capacity from 115,000 to 295,000 tonnes a year. More importantly, the Simpro sites now process only green waste. Conversion to TEG’s method, which includes food waste, will boost their earning power.

In order to help fund the £6.2m cash and shares acquisition, the company raised £6.8m gross through a placing at 33p a share. Most of the new shares were taken by Bridges Ventures, which now has a 22 per cent stake in the company.

Bridges Ventures is a social investment group set up eight years ago by Sir Ronald Cohen, a founder of Apax. Ian Hislop, who is representing Bridges as a non-executive director on TEG’s board, says: “The idea is to make socially helpful investments on a commercial basis.”

Raising £7m is a difficult call in today’s markets, Mr Hislop adds, as it is too small a sum for the vast majority of institutional investors. “We take a three-to-five-year view. We are not concerned with the day-to-day liquidity.”

Bridges, which has hitherto invested in private companies, took the decision to look at the quoted sector only a year ago and now hopes to do a couple of deals every year. It plans to hold its stake until the company grows to the point where other institutions are interested.

Separately TEG has formed a joint venture with Albion Ventures to build the £4m anaerobic digestion plant, which is expected to be commissioned next spring and will have the capacity to process 16,000 tonnes of food waste a year. Albion, which manages seven venture capital trusts, is providing 80 per cent of the capital in the form of equity and debt.

Albion likes to finance individual projects, including some in the healthcare and leisure sectors, but has also been looking at green energy. David Gudgin, a partner, says there are plans for about 200 anaerobic digestion plants across the UK, but few are getting the go-ahead because of fears of inadequate feedstock.

TEG, however, has long-term contracts to take waste from local authorities and has a £700,000 grant from Zero Waste Scotland, a government organisation supporting the waste and recycling sector. It has also entered a licensing agreement with UTS Biogastechnik, a German specialist in anaerobic digestion, which has supplied equipment to more than 1,500 biogas plants in Europe.

The methane produced will be converted into electricity by Alkane Energy, another Aim-quoted company. The plant is expected to produce 0.7MW of electricity and 0.25MW of heat, which will be supplied to a nearby ecology park development.

It looks a comprehensive package. But the banks were unwilling to back it as they considered the local authority contracts in Scotland were too short term at three to four years, although they are renewable. If all goes well, Albion will be only too happy to provide finance for further projects.

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