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To hear about Nucleus’ asset based lending facility, Finance Monthly speaks to Corporate Sales Director Ian Bath, who joined the company in July last year and has been working on developing their mid-market ABL business since then.

 

What is the Nucleus approach when providing asset based lending (ABL) to companies?

At Nucleus, our approach always starts with getting a good understanding of the business we are dealing with, the people behind it, and what they are looking to achieve. With the benefit of this understanding we can start to tailor a package of facilities that not only covers the anticipated needs, but the inevitable bumps along the road that every business experiences as well.

The Nucleus ABL offering includes not only invoice finance, but extends to stock, plant and machinery, and property as well. We have no hard and fast rules around the mix of assets that comprise the borrowing base, and will often fund assets that others may exclude, making our solutions truly flexible.

A particular specialism within Nucleus is funding contractors who operate within the construction sector.

 

What are the advantages of asset based lending for companies?

Asset based lending frequently enables companies with a strong asset base to get more leverage out of their Balance Sheet than traditional senior debt can provide. It is particularly appropriate for businesses going through a period of change - when they need to invest in growth. Cases where EBITDA is still modest, but the outlook shows an improving trend would be a good example of this. In these situations, it is difficult for a senior debt provider to get comfortable with lending against next years’ income in the same way as a secured lender can. Additionally, ABL facilities typically have fewer covenants than traditional types of lending, making the availability and predictability of funding more stable in times of uncertainty - as we are experiencing at the moment.

 

Can you talk us through some of the recent trends that Nucleus has observed in the ABL space?

The number of players operating in the space has increased significantly in recent years. Whilst Nucleus has traditionally focused on SME businesses, we have seen an increasing demand in the Mid-Market, and increased our funding threshold to £50 million in 2017. This is a factor of the so-called Alternative Lenders focusing on smaller opportunities and the American Banks hunting out sizeable cross border deals. Increasingly ABL within the High Street banks is working in conjunction with their leveraged finance teams and the basis on which deals are structured is heavily influenced by them, rather than more traditional ABL values.

We have also seen ABL and Private Equity working much closer together as their understanding of our offering, and the value we can bring to a transaction, has improved.

 

What are Nucleus’ goals for the future of your ABL practice?

We are committed to continuing our support for businesses in a range of industries and sizes, with our flexible offering of products. In 2017, we doubled the total amount that we have lent to businesses to £700m and this year, our ABL product will continue to play a significant role in Nucleus’ growth plan over the next 12 months and beyond.

 

CASE STUDY:

Key Stats:

Type:  Invoice Finance

Borrowed: £8m

Industry: Manufacturing

 

EXPERT TOOLING AUTOMOTIVE LTD.

Expert Tooling Automotive Ltd. came to Nucleus because they needed to replace their existing ID facility whilst retaining the same pre-payment and funding limit.

 

Established in 1972, Expert Tooling Automation Ltd. is a highly respected supplier and manufacturer for the British automotive industry. Expert is the largest Automation System builder in the UK, supplying specialist assembly line components to clients including Jaguar Land Rover, Aston Martin and Nissan.

The business has gone from strength to strength in recent years, increasing turnover by five times in under seven years. Previously funded by a bank, they needed to replace their existing Invoice

Discounting facility when their provider pulled back funding. Although still retaining a solid balance sheet and order book, after several overseas contracts ran into difficulty. Expert were asked to seek alternatives.

After consulting their broker, Expert was recommended to several finance providers. The deal was complex, with a high concentration needed for one of the debtors and it required a specialist understanding of the industry to structure the facility appropriately and support the client’s operations. Nucleus was the only funder who were able to fully meet their requirements and was able to match the previous provision and deliver the bespoke £8m Invoice Discounting facility that Expert needed.

Nucleus team spends time getting to know all the businesses that the company funds and this client chose them because of the flexibility and the direct access to decision makers that they offer.

 

Angelo Luciano, CEO: “Nucleus took the time to understand our business and the challenges around the nature of our project related trading. Nucleus offered a flexible solution that allows us to have other sources of funding where appropriate.”

Chirag Shah, CEO, Nucleus: “It’s personally rewarding to support businesses that represent the heartland of the British manufacturing and construction industry, a profitable sector that contributes to job creation and driving the UK economy.”

 

Contact details:

Email: contact@nucleus-cf.co.uk

Website: https://nucleuscommercialfinance.com/

There comes a time in the life of many businesses when owners cast around for ways to borrow money for growth. But those intending to use venture capital and private equity should plan particularly carefully before committing. Many don’t, and the result can be catastrophic.

Whilst the challenge is simple enough: to get the best deal whilst surrendering the least amount of control and equity. How to achieve that is less straightforward.

What goes wrong is poor attention put into the three basics: business plan, motivation, and due diligence.

Usually, the fractures start to appear because the borrowing enterprise has just not prepared itself. Unfortunately, the thought of ‘free’ cash in return for a slice of equity can tempt owners to make growth predictions that overreach reality. But the wise tread carefully and take advice. Without careful execution, the deals turn sour, with original management teams seduced into arrangements that end up with them losing both money and control.

There are horror stores out there. One UK business originally worth £5 million saw a £7.5 million private equity investment turn rapidly from a lifeline to a millstone, as it failed to meet challenging targets to which its owner had originally agreed. The software company now owes its backers £22.5 million in unpaid interest and redemption charges. Only one of the original management team is still in place and their stakes are now worth little.

This particular nightmare is neither the rule, nor the exception, but illustrates what can go wrong.

Private equity and venture capital can positively transform the fortunes of a business, injecting expertise as well as cash to help it grow. When it works, everyone benefits from a deal between risk and reward. But when it fails, the biggest loser often turns out to be the original management team.

In the end, the siren call of ceding absolute control for someone else’s financial support is not for everyone. Clients of mine stepped back from the brink, despite a willing lender. The reason was unease that the lender’s need for a return on their cash over a fixed term was at odds with the more relaxed instincts of the management team to let things in their restaurant chain grow organically.

The business plan is crucial and more than just a calling card. It is the basis on which the institutional equity investor decides how much to lend and what to demand in return. Firms that overstate likely growth to get investment are doing themselves no favours.

This is because valuations, upon which the entire deal will be based, are dependent on cash flow forecasts. Get them right, or better still, set them lower than they subsequently turn out, and everyone is happy.

But if the business has to keep going back to the investor, the lender will gradually wrest away control in exchange for their cash. They will insist, for example, on new agreements that may keep notional share ownership intact, but take control of decisions over fund raising and board membership.

In simple terms, the more a business falls short of an agreed business plan, the more it ends up giving away.

Which brings us to the next important area: motivation. A management team must ask itself what kind of life it wants. Once private equity is on board, a roller coaster ride starts. Demands are made, targets need to be met. The lender’s need to recover cost and secure a return requires growth at an agreed rate. This can be incompatible with watching your children play sports on a Wednesday afternoon, say. Do the soul-searching.

Nothing will be a problem if your business is growing, of course. But if it isn’t, expect a tough life. The management team must be wholly committed or problems start, particularly when targets in the all-important business plan fail to be met.

The final key component to borrowing money is to carry out due diligence on any lender. Examine the portfolio that every equity house lists. Speak to the firms involved and find out their experience.

Borrowing money from a bank is a far more removed, transactional experience than taking it from a venture capitalist or private equity lender. Their loans come with an expectation of involvement, so personal and professional chemistry is important. The process is effectively inviting a new member on to your key team.

Sometimes organic growth is best - not only because it allows more control to be kept by the original owners, but it can also be better as a fit. The culture of a business can be rudely disrupted by the keenly focused financial demands of an agreement with venture capital and private equity funders.

And choose wisely. The ideal lender will treat your enterprise as more than just a risk to be shared amongst many other. But remember: Private equity wants to have your cake. The trick is to avoid being eaten entirely.

Venture capital trusts (VCTs) remain front of mind for both SMEs and investors. In the 2016/17 tax period, fundraising stood at £542m – the highest figure in more than a decade – according to the Association of Investment Companies (AIC). Also, measures in last year’s budget and recommendations in the Patient Capital Review indicate that policymakers continue to see the strong value VCTs provide for both SMEs and investors and so, for 2018, the signs point to another strong year for the sector.

Here, Bill Nixon, Managing Partner at Maven Capital Partners, looks at the growth of VCTs as an asset class, their appeal to investors, and gives his view on the continuing value of VCTs as a source of SME finance.

The success of new share offers by the leading managers over the past few years illustrates how VCTs have increasingly been recognised as a mainstream asset class in investment planning and are becoming a common part of tax efficient and income-focused portfolios. Fundraising across the VCT sector as a whole has climbed steadily in each of the past five years, including a rise by around a fifth in 2016/17.

This burgeoning demand for VCT investments has been driven by strong long-term returns. Research by the AIC last year revealed that the top 20 VCTs returned on average 82 per cent by share price total return (a measure which takes into account both capital returns and dividends paid to shareholders) over the past decade. The very best performers achieved overall returns well into triple digits: for example, Maven’s Income and Growth VCT returned 187 per cent in that period. Top up share offers by Maven VCT 3 and Maven VCT 4 remain open, for both 17/18 and 18/19 tax years, with around £27m already raised from more than 1500 investors.

VCTs are attractive partly because they enable investors to enjoy significant tax benefits when putting their money into smaller, entrepreneurial UK businesses and participating in their growth. Investors in VCTs receive a 30 per cent upfront tax break, as well as tax free capital gains and dividends – provided they are willing to remain invested for at least five years.

The Government's aim in providing these reliefs is to encourage more capital to flow into riskier, early-stage companies. While this investment risk is an inherent feature of VCTs, it can be managed effectively for an investor by carefully choosing the VCT manager. The leading managers have up to 20 years’ experience of VCT investment and will employ a range of measures to achieve significant diversification and robust asset selection. An experienced manager will work closely with every business it backs, providing strategic counsel and operational expertise as the business grows.

Despite some concerns ahead of last year’s Budget that the levels of tax relief might be reduced, it instead adjusted investment criteria to ensure than VCT schemes continue to focus on investment in companies for long-term growth and development, rather than ‘lower risk’ investment primarily aimed at preserving capital. These changes confirm the position of VCTs as a vital means of drawing private investor capital to the SME sector and should ensure that VCTs remain attractive for investors. The continuing availability of long-term patient capital, at what is an increasingly important time for the UK economy, should give comfort to dynamic smaller businesses that they can continue to access vital equity finance, whilst allowing investors a route to participate in their success.

During the past couple of years it had also become clear that significant improvements were needed to HMRC’s Advance Assurance process, which had resulted in unnecessary delays to receiving VCT clearance on a large number of potential VCT deals. Streamlining Advance Assurance had been highlighted by managers across the sector as an important step in more efficiently directing capital to entrepreneurial businesses, and potentially boosting returns for investors. It was therefore encouraging that the Budget also announced that HMRC aims to enhance that approval process during the early part of 2018, which should help to improve the rate of new investments receiving VCT clearance and allow VCT managers to provide funding to the best available companies in a timescale that suits their growth plans.

Overall, VCTs have shown their worth from both an SME and investor perspective and this year’s fundraising is going well, with one or two VCT offers having already closed to investments. In the three years to mid-2017, VCTs had injected around £1.4bn of investor money into SMEs, illustrating their role as growth company funders and their performance and returns should see them further consolidate their position as an increasingly mainstream asset class in tax efficient and income-focused investment portfolios.

Research from Liberis, reveals that over half of UK businesses are unable to access the funding needed to grow; with the main hindering factor being a lack of education or understanding of their funding options. With falling SME confidence in the economy and mounting concerns over costs given the relative weakness of the sterling, Liberis strongly urges the UK to better support its small business community.

The lifeblood of the UK economy, SMEs contribute more than £200bn a year; with this number expected to grow by almost 20% by 2025. Yet, without a vital cash injection, this 2025 vision will be severely stinted.

Hindering growth opportunities, this lag in SME development may in turn negatively impact the economy. Liberis therefore believes it is crucial to ensure better understanding on how to navigate the perceived minefield of funding options. Small business education is desperately required to increase awareness levels of the process; greatly benefiting both businesses and economy alike. Such movement has been reinforced in a recent report from the British Business Bank, in which the UK Government backed organisation pledges its dedication to a more targeted educational campaign on the topic of SME finance.

While 62% of UK SMEs said they need funding to grow and expand, but 57% of SMEs were unsure which provider to obtain funding from and 53% did not have a set amount in mind when looking to access finance.

Liberis found 22% of businesses require funding to maintain business as usual, while 5% need funding to survive past the first year of business. Speed of funding has been identified as integral to achieving this growth. Other findings of the report showed an increase in the popularity of crowdfunding as a source, with 10% of UK SMEs looking to use this as a means for funding in the next two years.

Commenting on the report, Rob Straathof, CEO at Liberis, said: ‘These findings have opened our eyes to a lack of confidence and awareness among SMEs in how to correctly secure the funding they so desperately need. Funding will continue to be a hot topic for the small business community, but urgent action and collaboration is crucial to prevent resulting damage to the UK economy. Without sufficient financial education and support, the UK’s business ambitions will be severely affected but by ensuring they have the correct financial understanding, we can help secure and strengthen their livelihood; fast-tracking their ambitions.’

Established in 2007, in a space where traditional banking and loan models were finding it challenging to meet the needs of UK SMEs, Liberis provides fair and transparent funding options based on business potential, helping entrepreneurs achieve their goals and ambitions. Through its Business Cash Advance, an innovative form of funding, Liberis links repayments directly to cash flow so businesses only repay when their customers pay them. To date Liberis has helped over 6,000 SMEs, advanced £200m in funding and supported over 24,000 jobs in the UK. Moving forward, the company aims to further empower small businesses, broadening customer reach through strategic partnerships and international expansion.

With the explosion of cryptocurrencies over recent years, many businesses and start-ups are turning to Initial Coin Offerings, or ICOs, to raise money to get their projects up and running. This week Finance Monthly gets the lowdown on ICO management from Dr. Moritz Kurtz, CEO & Co-Founder of Acorn Collective, clarifying the point, purpose and benefits of launching an ICO.

In an ICO campaign, early backers of the venture buy a percentage of the cryptocurrency, often based on one of the existing public blockchains, in the form of tokens created by the company they are supporting.

An ICO can theoretically be used to fund any project or product in any category, however, before an ICO is launched it needs to clarify:

With so many ICOs in the marketplace you must lay out your concept in detail before launching an ICO. This way contributors can see the utility of your token, and understand what they are buying into. It also makes token holders feel part of the process of creating a new technology, platform or product.

Who should run an ICO?

Whilst any product or project CAN launch an ICO, that does not mean anyone SHOULD. ICO’s have become a popular funding model with start-ups looking to bypass the traditional, and more rigorous, process of gaining funds via venture capital backing.

Although technically an ICO model can be used to fund anything, it is important to consider:

ICO for Crowdfunding

An ICO could be greatly beneficial for the crowdfunding space, as it allows for the following:

Essentially, an ICO can be used to ‘crowdfund crowdfunding’.

How is an ICO mutually beneficial?

Successful ICOs benefit both backers of the venture and those relying on the funds it provides.

The backers can contribute towards a product or project at an early stage, thus benefitting from the increased demand for the token as utility increases. Meanwhile, projects can receive early funding to build their business venture without having to give away equity in the company.

Things to think about

Although launching an ICO can hold great promise for start-ups, it’s not all plain sailing.

Getting the funds can be tricky. When launching an ICO you must generate interest from contributors to encourage them to buy your tokens which, in a crowded marketplace, can be challenging. Not getting enough funds is one of the biggest risks. Not meeting the minimum target means the funds are returned to the token holders and the ICO is deemed as having failed.

An ICO is a great way of raising funding for the right projects in certain industries, but is by no means an easy solution. The ICO world is currently saturated with projects and competition for funding is intense. Making sure you have a viable and sustainable idea that requires blockchain is a good start. From then on, a successful ICO requires all the same focus on marketing and community building as any other form of fundraising.

For an Agile transformation to be truly successful all departments within an organisation need to be part of the journey. For finance teams this can be a particular challenge as historically change happens infrequently within finance practices.

Often finance departments are blamed for slowing innovation. In today’s marketplace the ability to pivot and quickly try new ideas has become critical to success. Below, Paul O’Shea, CEO of Kumoco, the management consultancy that specialises in Agile working and cloud consulting, looks at some of the simple steps finance can take to become an enabler of innovation

  1. Adopt a VC model for funding projects

Finance departments usually do not have a culture of reviewing value generated by projects as they proceed. Typically they engage at the start to approve budgets and at the end of projects to review ROI and manage depreciation. Working in an Agile way requires continual assessment of the value being delivered. This means that projects that are not delivering value can be identified and stopped earlier. Conversely those that are, can be promoted and additional investment assigned.

In practice this means finance departments should be encouraged to adopt a venture capital model. An initial budget should be allocated to kick-start a project, then value delivered is continually measured to trigger further releases of funding.

A finance department usually works to longer-term goals and does not have a culture of reviewing projects as they proceed to make sure what is undertaken is still valid and has not been overtaken by changes in the business or the market in which it operates. However, a more flexible approach is increasingly necessary as the pace of change in economies and markets has never been faster and companies need to be fleet of foot to survive. Finance departments should be encouraged to perhaps adopt a venture capital model, nurturing projects over defined periods of time. They could provide an initial budget to kick-start a project but then continually assess the project’s progress and validity before releasing further funds for subsequent stages to ensure that what is being funded is still relevant and is valuable for the business.

  1. Embed the finance team in projects

Typically finance departments sit apart from actual project teams.

This is in direct opposition to an Agile way of working, which involves continual assessment and development, to drive efficiencies and ensure projects are on track and are meeting evolving goals. To address this, businesses should consider embedding finance department members in the project team so they have a better understanding of the work being done and the strategy and goals. Finance team members could also benefit from Agile training where they receive an introduction to Agile and to understand its ethos and integrate more effectively with project teams.

  1. Use a range of metrics to measure value

Assessing value is not easy. A 2017 global survey by the Scrum Alliance showed that for 41% of participants[i], measuring value was their greatest challenge. To help finance departments correctly assess the value of Agile projects to a business there should be regular reassessment, the metrics should be standardised and value should be measured not solely by financial gains but through a range of key performance indicators (KPIs) to have a more holistic view of the benefits of the project on a business.

  1. Foster an Agile finance function

As well as the above measures, which apply across a business, fostering an Agile approach in finance departments is also a key part of helping to encourage an Agile and lean way of working in an organisation.

Adopting Agile will help finance functions to increase efficiency and speed through simpler data management by accelerating financial processes such as capital expenditures, resource allocations, reporting and analysis, leading to fewer controls and more real-time information. The result is more timely and actionable financial information that allows managers to be more Agile and responsive and avoid problems and recognise opportunities that will help to transform a business. This is supported by the 2017 CFO Indicator Report that found that 36% of CFOs would like their teams to spend less time on report preparation and data collection more time on forecasting and scenario analysis.

Simple techniques could be embraced, such as understanding how Kanban, a process designed to help teams work together more effectively, can help streamline processes and drive efficiencies. It may also be useful for the finance department to have a Kanban board, updated daily, so that everyone can see and understand how and why these tools work.

CFOs and their teams should also monitor and analyse non-financial KPIs, including customer satisfaction, customer relationships and brand reputation, which can be used to make more accurate forecasts, minimise risks and identify new opportunities.

  1. Training & preparation

Finally, finance departments should also make themselves transformation-ready and educate staff on the key role the finance function plays in helping to develop an Agile ethos in a business focused around developing a strong customer-centric culture, making a company more flexible and able to achieve goals that are rapidly evolving. The truly Agile finance function has the adaptability, skills and nimble effectiveness to help transform businesses of whatever size or sector - and take them to new heights.

[i]https://www.scrumalliance.org/scrum/media/ScrumAllianceMedia/Files%20and%20PDFs/State%20of%20Scrum/State0fScrum_2016_FINAL.pdf?aliId=270113596

All beginnings are difficult. Studies show that, on average, nine out of ten start-ups fail (1), and the shark tank that is the financial industry isn’t exactly renowned for allowing tender start-up shoots to flourish. The risk of failure and the fierce competition should not, however, deter you from launching your own FinTech. Instead, you can learn from others’ mistakes. Anyone seeking to start a successful FinTech company should carefully examine why others fail and avoid making the same mistakes.

So how do FinTech entrepreneurs meet the demands of a competitive and turbulent market, while trying to make it out on top? Tobias Schreyer, Co-Founder of PPRO Group reveals for Finance Monthly.

  1. Thoroughly analyse your market

The crux of any start-up is the business idea. The fact that an idea initially looks promising, however, is no guarantee that it will work in practice. The key here is for FinTech start-ups to begin analysing the market as early as possible to determine whether there is an appropriate and suitably large target audience for their business. By far the most common reason for the failure of a start-up is that there is no market for their idea. You must know the size of target market, what the competition is like, and what prices comparable products and services are fetching. Never ignore market analyses and align your business plan precisely with the results.

  1. Secure your funding in advance

Even (and sometimes, particularly!) FinTech start-ups want to attract financial backing. As with any other start-up, the issue of funding is right at the top of every FinTech start-up’s list. This issue can be roughly divided into two sections. The first is self-explanatory and covers the considerations which should be part of a traditional business plan and the questions which should ideally be resolved before the company is founded. These include things like how much capital is needed, the outgoings expected, and the potential profits. This is where you should investigate loans for company founders or appropriate grants and subsidies. The second part of the funding issue is more FinTech-specific. As, in most cases, you will be competing with banks or other FinTechs with a lot more money, so attracting partners and potential investors early on in the process is important. You should look for people who are excited about your idea and ready to invest.

  1. Always keep an eye on your finances, particularly post-launch

After the business idea, finances are the highest priority for any start-up, including FinTechs. This is a very broad subject. Not only should the company be liquid, it should also have a handle on accounting and taxes. Seemingly simple tasks like setting up a business bank account or applying for a company credit card can be a challenge initially. What if you have a business trip coming up, but your bank won’t give you a company credit card? What if it’s simply not available soon enough? Nowadays there are many clever financial products on the market which can also be used directly and easily by start-ups. Prepaid credit cards with associated online accounts are quick to set up, but are also secure and flexible to use. The centralised company account provides an overview of all expenses at all times, as well as the requisite flexibility when expenses arise. You must never lose sight of your company’s financial status. This may seem obvious, but failure to manage finances has spelt the downfall of many a start-up.

  1. Determine the appropriate form of organisation for your company

Choosing the right legal form of organisation is an important decision for a new company, and one that start-ups need to consider very carefully. Although, once selected, the legal form is not set in stone, changing it later can involve some effort. The form of organisation defines the legal and taxation framework conditions for a company, so your choice must suit the needs of a FinTech start-up.

  1. Apply for licenses and register in good time

Start-ups should focus much of their attention on their product offering and customers, but even the best product and customer service can be at risk if you don’t have a handle on your day-to-day business operations. Start-ups must perform a great many administrative tasks, including registering with the tax office, listing the company in the commercial register, accounting, sales tax, and more. But to add to that already extensive list, FinTech’s are also subject to additional regulatory pressures. The second Payment Service Directive (PSD2) will, for example, come into force at the beginning of 2018 and can mean major changes for providers of alternative payment methods. Any financial service which can make automated payments at an end-user’s request while collecting and transferring data must obtain a PSD2 licence from the national financial regulatory authority.

(1) forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/#915f29c66792
(2) cbinsights.com/blog/startup-failure-reasons-top
(3) crosscard.com/solution/crosscard-expense

Sustained economic growth and the fall in the Sterling exchange rate have put record pressure on British businesses to increase the amount of money tied up in working capital, leaving them at risk if growth were to weaken in the months ahead, according to the latest report from Lloyds Bank Commercial Banking.

Firms across Britain now have around £535bn tied up in excess working capital – up seven per cent from £498bn since the last report was released in May – meaning that firms could struggle to free up cash either to grow or to weather turbulent financial conditions.

The sustained growth seen in the past 12 months – particularly in manufacturing and in the services sector – has increased the amount of cash tied up in the day-to-day running of businesses, with the impacts from the fall in Sterling, forward purchasing of inventory and a rise in input costs, being fully realised.

At the same time, one in four businesses said their customers had taken longer to pay during the past 12 months, increasing the value of firms’ outstanding invoices.  This comes as businesses are continuing to rapidly build up inventory, leading to more cash being locked up in stock, which is then unable to be used for growth.

With as many as one in three firms saying they are concerned by economic uncertainty or a fall in sales during the next 12 months, these factors could spell trouble for British businesses if economic conditions declined.

Adrian Walker, managing director, head of Global Transaction Banking at Lloyds Bank, said: “Increasing pressure for British businesses to hold more working capital has to date largely been driven by economic growth fuelled by the fall in Sterling. But, if there were any economic obstacles on the horizon this could be a double-edged sword.

“By locking up cash in this way, it stops investment in other more productive areas of the business, whether that be investing in new people, creating new products or targeting new markets.

“With as many as one in three businesses telling us that their greatest concerns for the next 12 months are economic uncertainty or a fall in sales, this reliance on future growth prospects is concerning.”

The findings come from Lloyds Bank’s second Working Capital Index, a six-monthly report that uses Lloyds Bank Regional Purchasing Managers’ Index (PMI) data to calculate the pressure British businesses are under to either increase or decrease working capital.

Working capital is the amount of money that a company ties up in the day-to-day costs of doing business. Growing businesses tend to use more working capital, while pressure falls when firms realise they are facing challenges.

The current Index reading of 108.0 is an increase of almost four points, from 104.1 at the end of 2016, and is just below the highest point seen since the research started in 2000.

The Index highlights that with the UK’s domestic outlook looking weaker, businesses are increasingly going to need to rely on exports for future growth.

While the current relative weakness of Sterling makes conditions for international trade benign, the practicalities of exporting mean that it often places even greater stress on working capital through shipping times and slower payments.

Mr Walker added: “Whether businesses expect to grow through exporting, or they anticipate challenges due to weakening domestic demand, UK firms could benefit from the operational efficiency and cash flow boost that comes from working capital improvements.

“In the past, previous highs in this Index have coincided with improving financial conditions. The fact that the Index is currently climbing while financial conditions remain relatively low means businesses are taking on more and more risk.

“Our experience is that businesses that undertake a programme of working capital improvements can typically release around three to five per cent of turnover in additional cash, allowing them much more freedom to invest in growth, trade internationally, expand their product set or to give themselves a buffer to see them through more troubling times.

“But doing so successfully isn’t easy. It requires change across a number of business functions, and so the time to undertake that work should be done ahead of embarking on further growth, a new exports programme, or before any possible future storm hits.”

Manufacturing under pressure

The manufacturing sector has been a source of hope and opportunity for the British economy in recent months as the fall in Sterling made British manufactured goods more competitive overseas.

But the sector’s growth, together with rising import costs and pre-purchasing of materials in expectation of inflation, has pushed the sector’s working capital index to 126.1, which could be hampering growth amongst manufacturing businesses.

This compares with readings of just 105.0 and 104.8 in the services and construction sectors respectively.

Regional variations

The pressure to increase working capital grew in every region apart from the East of England, where the Index fell from 112.0 to 107.8. Although, the East of England still saw high pressure on businesses to hold more working capital.

Scotland, where a reading of 99.5 indicated pressure to reduce working capital six months ago, saw the biggest increase, with the Index reading rising more than five points to 105.2.

Wales remained the region with the highest pressure to increase working capital with the Index climbing from 113.7 in April to 114.3 now.

(Source: Working Capital)

Damon Walford, Chief Development Officer at alternative lending industry pioneers, ThinCats, shares his thoughts with Finance Monthly on how SMEs can get the right mix when it comes to funding.

Alternative funding offers access to finance that ticks many boxes; from faster turnaround times, to flexible rates and a more in depth probing of the story behind the application. It also provides an ideal avenue to supplement private equity, venture capital, Angel investors and crowdfunders.

Alternative loans for business are more accessible when equity is part of the mix, especially in cases of business acquisition, refinancing and property development. Lenders like to see an element of entrepreneur equity as “skin in the game”, but there is an important place for 3rd party equity which may be on a different scale to that of the entrepreneur, providing meaningful impact on the risk profile of any loan.

Where appropriate an equity and term loan mix will:

ThinCats has huge experience in this area, and has successfully financed a range of projects where a mix of funding has provided the ideal solution. In one case, an MBO team wishing to acquire a business with justifiably high goodwill had their own equity but there was still a funding gap. This is often covered by a deferral of part of the purchase price, but in this case 3rd party equity was the best solution.

Where a sound business may have suffered a financial shock, e.g. bad debt, an equity mix can be the saviour. ThinCats has funded just such a company, where the balance sheet value needed reinstating with equity, but a cashflow-based term loan was also appropriate given underlying trade. In this case, it was impossible to finance wholly on debt, too expensive purely through equity, but very viable to provide the mix.

A property developer had a project ambition that they couldn’t fully fund through their own resources or with the highest Loan to Value debt commercially available. 3rd party equity was used to bridge the gap providing a structured debt & equity solution.

Most deals of any size will have an element of equity and debt in them, often provided by the entrepreneur, but 3rd party equity is key to getting certain deals financed.

British entrepreneurs are being offered the chance to develop financial services ideas in one of the top financial regions in the US, with a $100,000 (£77,000) equity-based grant and a package of support for growing businesses.

The initiative aims to bring up to twelve of the most promising emerging financial companies in the world to Ohio and help them boost their growth beyond the start-up stage. Equity-based grants of $100,000 per firm plus coaching, office space, visa support and a strong business network are all being provided through the accelerator Fintech71.

Valentina Isakina, Managing Director for Financial Services and Select HQ Operations at JobsOhio, said: “Ohio looks ahead to the future by investing in technologies of the next generation. Our financial services sector is one of the strongest in the world, and it is always actively seeking innovative ideas and partnerships. Here people are more approachable and doing business is easier, so these innovative companies will have a better chance to blossom into the financial stars of tomorrow. JobsOhio is happy to support this innovative industry effort.

“Getting beyond the start-up phase is always difficult even when entrepreneurs have a great idea and have managed to get their business going, so the financial services industry wants to give them a helping hand by creating Fintech71. By bringing them here to enjoy Ohio’s support and hospitality, they will make contacts that will last a lifetime and benefit everyone.”

Fintech71 is aimed at start-up and scale-up businesses from all over the world which have matured enough to present a well-thought-out concept to test with a corporate partner or a market-ready business model. The application deadline is July 17 via www.fintech71.com.

The accelerator has a not-for-profit model and will negotiate a customised, entrepreneur-friendly equity-based participation in exchange for a grant of US $100,000 and access to the accelerator program for each of the selected companies. The finalists will be invited to the state capital Columbus to receive coaching from leading experts of the industry from mid-September to mid-November, in order to further develop their business ideas.

Additionally, the selected start-ups will get the opportunity to build relationships with the sponsor businesses, which are well established in Ohio and throughout the USA, and to network with mentors, partners, and customers. The selected start-ups will have access to free office space in the city centre of Columbus, with foreign businesses will be supported with their visa application.

Some 270.000 people, nearly the size of NYC’s workforce, work in the financial industry in Ohio, one of the largest in the USA. Ohio is also an innovative and successful hub for a large number of other industries, including automotive, aerospace, mechanical engineering, and chemicals. The state is among the top five US states for Fortune 500 and Fortune 1000 headquarters.

Fintech71, named as a nod to the cross-state highway I-71 connecting Ohio via its three largest cities, is backed by leading enterprises, banks and insurers from Ohio, like KeyBank, Huntington Bank, Grange Insurance, Progressive Insurance and Kroger, the largest food chain in the USA. JPMChase is also supporting the program, leveraging its large technology presence in Ohio. JobsOhio, the innovative non-profit economic development corporation, is supporting Fintech71’s operations along with its industry expertise, state and national contacts.

“Fintech71 and Ohio are ready to compete on a global scale given the alignment of the state, the private sector and its entrepreneurial ecosystem,” added Matt Armstead, the executive director for the accelerator.

(Source: JobsOhio and Fintech71)

The next game changer that Finance Monthly had the privilege of interviewing is Mark Swindell – the founding partner of Rock Infrastructure. Mark has over 28 years of experience of working in the City of London, New York and Europe. For the last 20 years he has specialised in developing innovative funding, financing and procurement strategies for major infrastructure projects and has worked on most of the groundbreaking PPP transactions. He has worked in the interests of the public and private sectors across the transport, energy, defence, healthcare and social infrastructure sectors to create long-term, privately financed projects with incentives which reward success against output driven objectives and which create public sector value for money.

Mark created and led DLA’s Commercial and Projects group, which grew to 130 lawyers. This group completed over 160 PPP projects in ten different territories over ten years. He became global head of the Infrastructure and Defence Sector at DLA Piper in 2007 and was the principal editor of the five DLA Piper European PPP Reports published between 2005 and 2010. The last of these was sponsored by EPEC and the European Investment Bank.

In April 2011 he left DLA Piper to form Rock Infrastructure. Rock Infrastructure now focuses on developing new infrastructure businesses including setting up Rock Rail Holdings Ltd, which successfully financed the acquisition and leasing of rolling stock on both the Govia Thameslink Railway’s Great Northern "Moorgate” route in February 2016 and Abellio’s East Anglia franchise in October 2016. 

 

As a professional working within Private Finance going into large infrastructure transactions - what has previously happened in the Private Finance Industry?

Globally, governments wish to provide infrastructure in their countries, since this is a way of growing and kick-starting their economies. Donald Trump promises that about 600 billion dollars will be invested into the US infrastructure market. In the UK, the chancellor recently discussed his plans to spend £24 billion on infrastructure projects in order to kick-start the UK infrastructure market - the UK Government has just given its approval for the nuclear power station at  Hinckley Point, there’s the plan to expand Heathrow, and we have also been working on High Speed 2 (HS2). Across Europe, the European Union is expanding its seed funding in order to invest money into European Union countries’ infrastructure. Countries like South Africa, Australia and emerging markets have also done a lot of infrastructure work in recent years. The model that many governments across the globe have been following for funding infrastructure projects is the Private finance initiative (PFI). This is a way of creating Public-Private Partnerships (PPP) by funding public infrastructure projects with private capital. It basically means that the Government itself spends a lot of time and money on consultants, advisors and contractors at the early preparation stages of procurement projects. While I was still working as the Global Head of Infrastructure and Defence in DLA Piper, this model worked for the public sector, as well as the private sector and the banks that were investing into the market. At this time there was a high level of standardisation. What the Government didn’t like however was the fact that these procurements were taking too long – it was taking 3-4 years to get into a contract, which was before the building phase even started. 4 years, in the cycle of politics, is a long time to develop a piece of infrastructure, before the spade even touches the ground.

In a nutshell, the PFI/PPP system was highly complex and very inflexible in its ability to meet changing needs. Despite being widely used by the public and governments, the system wasn’t solving a lot of the infrastructure related problems that they were seeing. With the financial crisis, another issue was that banks, who were well used to structuring these types of transactions, did not want to lend for a long period of time. This resistance to long tenors was at odds with the whole of PFI/PPP market which is based around 20 years+ tenors.  During that time, the governments were saying that they were not sure that the model was really working for them since the 3-4 years before construction took place was very risky and, at the same time, the banks were saying that they didn’t want to lend their money to PFI projects with such lengthy tenors.

While this way of delivering infrastructure really started in the mid-90s, it had begun to struggle by the end of 2010.  Another big concern of the industry during that time was the lack of a pipeline. Professionals believed that they’d got a strong industry that they knew what they were doing and yet, all that everyone was waiting for and chanting about was a new Government pipeline. There was plenty of equity and plenty of debt waiting for a pipeline, in order to be put to work in infrastructure. Many of the pension funds performances were not as good as they once were. At the same time, a lot of interested parties were starting to think they should be allocating some of their resources to infrastructure since infrastructure continued to pay a constant and regular yield. As a result infrastructure became an alternative asset class that pension funds started to look at more and more. The pension funds and the insurance companies were looking for products and the Governments wanted them to put money into the products without creating more of the PFI and PPP products. This made a lot of people turn to the secondary market. This secondary market was post-construction so all the big risks were gone. Now they were just buying, remortgaging and refinancing the book and the value for money out of those secondary market deals soon came down.

Today most people don’t even consider buying a secondary market since the value isn’t there anymore. By the end of 2010 there was a lot of equity and debt therefore waiting to be locked and invested in long-term infrastructure, for the benefit of governments around the world to allow people to use and similarly benefit from essential, core infrastructure.  People were looking for the right model to do that.

 

Could you talk FM through the establishment of Rock infrastructure and how this has proceeded to the birth of Rock Rail Holdings and its role in the public sector?

When I got involved early on in PFI, a lot of the early PFI transactions were pioneering, innovative transactions and you had to work quite hard to find where was the good value for money for the Government to transfer risk and where it wasn’t good value for money. The best way to achieve this is by working with all the members of a party – as part of a dynamic process happening on a real-time basis and resulting in the successful delivery of the project.

What I realised around 2010-2011 was that it was the right time to get out of the tank and get into a little speed boat and start to look for the new pioneering innovative strategy to reconnect the Government so it starts stimulating investment in infrastructure and, at the same time, to allow the industry to come together in a way that makes sense for all parties. From the Government’s perspective, it had to be done quicker and it had to be less complex. The Government shouldn’t need to interfere – the markets should make the project work or not. Finally, it had to deliver value for money and be structured in a way that is attractive to pension funds and direct investment into the market.

The real long-term advantage of infrastructure and the one that I believed stakeholders would be interested in is connected to the Government’s long-term interest and the pension funds’ long-term investment horizon. Thus, in an attempt to put these two large stakeholders together and try to minimise the time it takes and the cost that is taken out of it – I created Rock Infrastructure in April 2011. Its mission from the very beginning was to create infrastructure businesses which would be able to efficiently deliver direct investments from pension funds into Greenfield and Brownfield projects. I don’t look at secondary markets, and I don’t look at sales of assets or already constructed assets. I look at trying to bring efficiency in the way that the industry works. There was a large dissatisfaction with the way that current markets were working, so my plan was to come up with a more efficient approach to restructuring the way that the industry stakeholders talk to and deal with each other. It was a new attractive proposition for bringing in new sources of funding and creating new relationships between the parties, while we develop the way that the sector operates.

In relation to the railways sector - all of the UK rolling stock back in the mid-90s had been sold a number of times to organisations that were efficient at leasing trains to train operators. However, they were not adept at delivering value for money nor financing new trains into the marketplace. The UK Government therefore did two big deals in relation to bringing new trains into the network. One of these was called Intercity Express Programme and I got to work on it with Hitachi for 4 years. The Intercity Express Programme was a pioneering rail procurement project. The second was Trainlink. Both those projects took 5 years to get financially closed from beginning to end. Clearly, it took a long time, a lot of cost from the Government side and from the private sector side, and a lot of effort to get the deals finalised. After their completion however, the Select Committee expressed concern about the Government interfering in the rail market and that it was basically giving a 20-year guarantee to say that these trains would definitely be used for the next 20 years. The operators were also told that they would need to use these new trains.

This is when we created Rock Rail Holdings as a part of Rock Infrastructure. Rock Rail was established to focus on better procurement and funding of essential rail infrastructure, enabling better alignment between the investors, the tax payer and fare paying passenger; a funding solution which is off government balance sheet; and offering better value and affordability. Rock Rail started to compete against financial organisations and in providing new trains. It’s taken us about three years to achieve this but we have arrived at a place where it takes us 6 months to close a deal – from an announcement of a franchise which will involve new trains to finalisation. The value for money is palpable and there is now direct competition.

We are providing significantly better value for money so the Government, the train operating companies and the pension funds that have invested in our projects – Legal & General, Standard Life, Sun Life of Canada, and Aviva among others – are happy with the deals and have invested directly in the rolling stock assets. Once the deal is completed, we then manage the construction process. We don’t get paid any fees, since we’re not a consultancy. We invest equity into the transactions and we invest into the assets and therefore we get a minority stake in the businesses, which is normally between 6-10%. Clearly therefore, we get complete alignment of our interest with those of the pension funds. Once the trains are delivered and we release them, the value of this investment goes up which results in our value going up too. What also makes our business a game changer is that we do the deal and then we stay with the deal until its conclusion.

We finalised the Moorgate trains transaction valued at £300 million in February, and we also did another £700 million worth of trains for East Anglia in October – which adds up to £1 billion pounds worth of trains in 2016. We’re currently bidding for another £1 billion worth of trains next year and we expect the same from 2018. Rock Rail Holdings is also particularly interested in getting involved in HS2 trains.

We are also looking at creating a number of additional separate businesses including plans in wind farms, offshore wind and financing OFTO Build. Network Rail – financing electrification, signalling, depots and stations, is another business area we are currently working on as well as business opportunities in roads, tunnels and bridges. At Rock we don’t wait for a pipeline - we go to governments directly and we talk about what we think a proposition could look like, from a value for money point of view. The public authorities help us manage significant risks and for that we’ll be quite happy to offer them more money in return. We are getting value on the risk transfer, and this is the way to go, rather than how the private sector funds operated in the past.

We are now planning on investing in other markets and are looking forward to a very productive two to three years to come in creating new and pioneering infrastructure businesses.

 

As a game changer in the field of infrastructure development, what is your advice to project developers and their approach to funding?

Since there’s no revenue stream, managing a business as a project developer is quite hard, because you don’t have a regular cash-flow. This means that as a project developer you have to go very deep into a deal or a particular business stream. You do kick a lot of frogs and you have to be quite decisive and flexible. You need to be passionate about changing a particular area. You have to listen a lot, you have to be very focused and not embark on many different projects at the same time. And last but not least, you have to be entrepreneurial – changing your approach, completely adapting and then always keeping ahead of the game by changing the way you see things and by learning from what you’ve done to try to be better next time.

 

The Pension Protection Fund has today published its annual Purple Book analysis of the state of health of the UK’s final salary pension schemes. The data covers 5,794 schemes and shows that in spite of substantial additional employer contributions and positive stock market returns, UK employers remain a staggering £779.9 billion in debt to their current and former employees’ pensions. Even on a s179 basis, which is the amount required to meet PPF level benefits, schemes are showing an aggregate deficit of £221.7 billion.

Special contributions are one-off payments in excess of the annual funding commitment, specifically to reduce a scheme deficit.

By contrast to the relatively low levels of defined benefit scheme membership in the private sector (public sector schemes are not covered by the PPF), there are now around 10.5 million members of defined contribution pensions.

Tom McPhail, Head of retirement policy, Hargreaves Lansdown commented:

Funding

“Scheme members have built their retirement plans on promises made by their employers. It is now up to those employers and the pensions industry to deliver on those promises. There should be no compromise over the level of benefits, no sneaky watering down of inflation-proofing terms to get the schemes off the hook.”

“Looking forwards, the future lies with defined contribution pensions. Too often the transition away from final salary pensions has been accompanied by massive cuts to employer contribution rates. The average defined benefit scheme employer contribution is 16.2% of earnings, compared to just 2.5% going into defined contribution plans. This trend in reducing contributions has to be reversed.”

Consolidation

“Consolidating some of these legacy pension schemes would be technically challenging but worth pursuing. It costs two to three times as much per member to run a small scheme as a large one, with consultants, independent trustees, actuaries, accountants and lawyers all taking a cut. Fewer, larger schemes would mean better security for members and lower costs for employers.”

Investment strategy

“The relationship between employers and the UK pension system has changed significantly in the past ten years. Pension schemes used to be owners of UK companies as well as being funded by them. Now, the bulk of scheme assets are invested overseas or in bonds. What’s more, as schemes mature, they will increasingly become net sellers of assets. Pensions being used to help finance the growth in British companies is becoming a thing of the past; instead our savings are either being lent to the government or invested abroad.”

The weighted average asset allocation to Equities has fallen from 61.1% in 2006 to 30.3% today; of this equity allocation, the proportion invested in listed UK shares has fallen from 48% (2008) to 22.4% in 2016.

(Source: Hargreaves Lansdown) 

 

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