The investor who wants to scale-up your business

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0:41We look forward to seeing you there. One of them said, what if we don't agree to it? And I said, well, tomorrow morning when everything crashes, you can explain to your shareholders that you didn't fancy doing what we're asking you to do. So that was the end of that conversation. And so Alistair Darling said, try and understand the deal better. It was like, you don't understand. Once you understand, you'll sign. I was just trying to sort it out because the clock was ticking all the time. If we did not have a done deal by seven o 'clock the following morning, that was it. That was Lord Alistair Darling, the former Chancellor, talking about the multi-billion pound bailout of Britain's big banks during the financial crisis.

1:23That clip was from a BBC documentary about the financial crisis. One of the consequences of this bailout was that the government got the UK's big banks to create the Business Growth Fund. BGF was designed to help fill the funding gap facing promising businesses in the UK and help ambitious entrepreneurs turn their promising small and medium-sized businesses into large companies. So has it worked? And what does BGF look for in the businesses that it invests in?

2:00I'm Graeme Ruddick, and this is the Business Leader Podcast, where we look at the stories and strategies behind modern businesses. In this episode, I speak to the chief executive of BGF, Andy Gregory, about what is now the most active investor in small and medium-sized businesses in the UK. Since it was set up in 2011, BGF has invested more than£4.5 billion in more than 600 hundred businesses across the UK and Ireland.

2:30It's a very unusual origin, so definitely worth covering. So we were, I guess, born out of one of the few positives, hopefully, I would say, of the financial crisis back in, ultimately, 2011. That's when we were established, but conversations obviously preceded that. So, clearly, a lot had gone wrong in the broader economy. And there was a pretty broad view that what the UK SME market lacked was a provider of genuinely growth-focused capital. So obviously lots of capital around, lots of private equity, debt, maybe too much debt back then. So a perspective that actually flexible, patient growth capital was what was needed.

3:16So cross-party, government-initiated, both very much working with the banks. and we were formed as an, critically as an independent commercial business with a very specific remit to fill a gap in that marketplace. And then probably just touching on, I think it's important, and this is part of my background at private equity, back in the day, lots of private equity operating at that lower end, you know, a three-eye, way, way back in the 90s, 80s, 90s, doing exactly that. But the economics had taken many of those firms. sometimes Bridgepoint, one of my old employees, naturally upscale. So a gap existed.

3:57So the purpose was very much to fill that gap and to provide, as I said, flexible capital to support SMEs. And also specifically and importantly, and probably as important now as it was back then, frankly, is to support companies outside of London and the South East, recognising that was a market that was relatively well serviced by capital. So that was the remit with a very clear focus. And as I said, I think also very importantly, I think it was the bait at the time that set up as a, I think critically as an independent commercial business to really try and ensure, which I think hopefully we have done, I'm sure we'll come on to, you know, how we have done since then.

4:38But to basically give us the best chance possible of being a proven long term sustainable business that will be here for decades to come. in 2025 bgf outlined the next stage of its ambitions another three billion pounds is going to be invested in uk businesses over the next five years with 500 million going into early stage businesses in life sciences and deep tech i asked andy gregory how he thinks bgf is doing with its mission so far i think pretty well and i've been obviously conscious i'm i am saying this So I think with an appropriate level of humility and self-awareness, I would say I think fairly well.

5:17I would hope our shareholders would. I think they would agree with that. How do you measure that? Probably an important question. I think that would be in a number of different fronts. So I think first and foremost, we have stayed true to purpose. I think very importantly, I think some people at the time perhaps suggested that we might do what pretty much everyone had before us is to actually go up scale and go up market. and do buyouts and the like. We have not done that, so very clearly stayed true to purpose in filling that gap that we've just discussed. But in terms of then fulfilling the potential, there was a 2.5 billion commitment from the four shareholder banks back in 2011.

6:03But clearly at that point, we really did not know what the opportunity, the scale of the opportunity was. Very important for us being established which was we were coming in to stimulate and grow the market. We were not coming in to replace existing providers of capital. So it was to really stimulate and build and grow and augment the existing marketplace. So if I look back, we've deployed now over$4.5 billion. So clearly that includes some recycled capital along the way. And we've backed, since then, 600 companies along the way. So I think that's very positive and arguably probably exceeds what was expected.

6:41I think commercially, you know, how has that gone? I think very positively, and it has taken some time because we are a patient provider of capital and our portfolio therefore represents that maturity curve, that over the last maybe four or five years, we have ultimately now seen the exits coming through. So that has proven out, I'm delighted to say, the business model. So, you know, strong returns coming through, generated cash we've paid dividends the shareholders so the so the model has worked so that's very positive but it's not just about the numbers um so i think you know why why were we created there's obviously lots of other benefits that hopefully you would expect to see coming out of that activity so some of the more obvious headline metrics i would shine a light on would be employee growth in the portfolio.

7:34So if you take a bulk of our portfolio alone, there's been 27 ,000 jobs created over that period. I think it's over 7 billion of additional revenue, a billion of additional exports, and I'm sure a raft of other data in terms of investment, capex that's gone on over that period. So I think there's definitely been a broader economic benefit because we're not buying businesses to then leverage and just sell on. We're very much backing businesses with capital to help them grow and then the other thing i would this is a bit self self-praise but given you given you asked the question graham um i would also come back to the regional presence which i mentioned earlier is i think so important and and i think some recent data suggested that imbalance is actually slightly worse now than it even was back in 2011 in terms of of the regional share of the pot in a way, you know, coming down slightly over that period.

8:33We've very deliberately built out the network from four offices on day one to the 15 that we currently have, 13 in the UK and two in Ireland. And we've done that very deliberately because we believe that being on the ground, getting to know entrepreneurs, getting to know local networks really helps us in terms of engaging entrepreneurs explaining why what we do is different and it does create a different opportunity for companies to go down and that's played a massive part in us I think doing the 600 odd investments that we've done so over that period roughly three quarters of what we have done has been outside of London and the southeast so there was a lot more we can do we can definitely continue to improve many aspects of what we do but in terms of you know how it's gone overall you know i think pretty pretty pleased and what about the future you've just announced a new commitment of three billion pounds uh with 500 million i think of that in particular earmarked for sort of early startups what does that mean for how things may evolve for bgf moving forward well i think it's a healthy balance to my mind i think we've got to this point as I touched on earlier where a good few years of exits proven out the model but at the same time I believe there is much more we can do and arguably should be doing to support broader UK SME landscape but not just us obviously loads of other people doing lots of other great stuff in there but of the investments we made last year to be one data point about half of those investments came to us through our own channels so they were not businesses coming to us through intermediaries or corporate finance advisors.

10:24These are businesses that we were going out to, by and large, to target, introduce ourselves. And it's a long term because that could be many years between first conversation and ultimately an investment being made. But I think all of that to us suggests that there is more we can do. So confidence, the model is working. Confidence, there's more that we can do. Arguably, if there were ever a time in the economic cycle where more growth is needed, it is now. So for all those reasons, we felt it was appropriate to make a stronger, bolder statement in terms of our appetite to increase investment. But at the same time, I'm not a gung-ho individual.

11:08It's been my colleagues for Public Confirm, I would imagine. So we've invested about 2.3 billion over the last five years. We're not talking about some sort of ridiculous, unrealistic step up on value. It's absolutely realistic, but it feels like it's a really appropriate time for us to be backing ourselves and looking to do more. Would you say until now you've sat somewhere in between venture capital and private equity? With the new commitment, will we see you move more towards venture capital? no i no so i think in terms of the two main pockets of activity that we're looking to scale which would be growth and what we call early stage i.e venture so very keen that we continue to build both of those investment streams but very much what i was saying earlier but at the same time very much remaining true to purpose so in the growth business so that would be probably you know established businesses that aren't dependent upon future rounds of funding they're profitable or close to, you know, we're still very much focusing on staying true to the origins of where we were.

12:15So we're not looking to go upscale private equity wise, but I think there's a lot more we can do in that area. But at the same time, in early stage, where we're investing in, you know, arguably, you know, reasonably early, so sort of pre-A, pre-revenue in many, many cases, but very much focusing on life sciences and technology, there's also a lot more that we can do. So I think the opportunity is to build both of those. So far, we've spoken about BGF strategy and its plans for the future. But who are the businesses it is investing in? And what does it look for when it's making an investment? It's really exciting.

12:50We're back to so many businesses over the period, some of which, particularly the other days, I got to know quite well and others, sadly, with the rule now, not as well. But some of the businesses I would really bring out would be on the consumer side that probably probably better known to to listeners so businesses like Brompton Bicycles which we're absolutely delighted to to back and you know a fantastic again a success story of a UK business building a really innovative model great global brand you know high proportion of exports you know very exciting um Strathbury up in Edinburgh obviously you know high-end fashion bags etc but then also in other sectors maybe going back to some businesses that i i knew particularly well back in the day up in the north of england just a bit of a contrast and springfield health care so it's a care a care business that we first backed back in way back in 2012 and i think just to illustrate uh patient capital and flexible capital a business that we backed in many future rounds of capital.

13:55We invested about$2.5 million on day one and ultimately close to$40 million ultimately, which we realised that investment, a sale of the business just last year. Kids Planet would be another great example. So family nursery business based in the northwest of England, which again we're attracted to our type of offering and we backed that again with several follow-on checks over a period. That was a business where the family and the founders were keen for a realisation event which happened. US private equity came in and we then have since reinvested alongside USP. So it's a very, very broad range, a broad church.

14:39What are you looking for in the business? Lots of different things. It means so much. I think anyone who you ask that question, I would imagine would say people, but I think for us it's it's it is that but compounded several times and why do I say that because we've not not really touched on this so far so all we do is minority so so we are not buying businesses I mean really important point to make and obviously in early stage that's fairly normal you get these VCs taking a minority stake and the investments are working alongside other co-investors in growth which the majority of what we do it will tend to be the only institution on the cap table, but in all those investments, we will only be a minority.

15:22So we're very, very clear on that approach. So we are still, we're ambitious, we'll be challenging, we want to be aligned with entrepreneurs and other shareholders, but we will be a junior partner. So for that reason, the people aspect is even more important than it would be to any investor. And then what is it in people that we want to see is some of the very obvious characteristics of drive, ambition, clarity, vision, those. But I think where we really see it really be successful is when that's augmented by a broader perspective, arguably, an appetite to have a broader perspective, to be influenced.

16:11so someone who definitely knows their own mind has that drive, has the resilience but also is keen to learn and get support where it's required as they go along that journey How often are you the first investor going into some of these businesses? How important is building up that trust with the investor and making them comfortable with you coming on board? I think it's huge and I think it should be so I think it's a really, really important point it links a little bit to the point I was making earlier on their regional presence so to answer your question sort of quickly um in most cases we are the first institution to come into the the business so for that reason it is not just about an economic transaction it is a huge step for someone to bring into the business an institutional investor you know onto the board we will they will virtually always take a board seat and often an observer right attached to that so it's a huge step for any entrepreneur to take and you know probably their life's creation so for us a very important part of the process is assessing the individuals the entrepreneurs that we're backing but absolutely very importantly that's that should be the other way around and the entrepreneurs should be should be really trying to understand and assess us and i think trust because you can have all the documents in the world you can do all the referencing in the world as well which people should do but i think it's a large part of it really comes down to respect trust and ideally as much alignment as possible i mean we will always obviously you've got you know management team institutional shareholder you are never going to be totally aligned but as as far as possible if that alignment can be maintained um you know clarity um you know communication respect then inevitably that results in a much more um a much healthier backdrop that gives the business much more chance how do you go about building that time time is a is an important part of it i think most businesses that we back we have tended to have met them some way before a transaction has been contemplated so we really i think we're where it's a business that's gone to market with an advisor and it's you know here's the book and come back with offers by next tuesday and that doesn't really work for us and i'm not sure that's actually often the healthiest thing for the for the entrepreneur frankly in my in my humble opinion and i think for us much much better to have engaged for quite some period of time which then facilitates and allows you know very much a two-way relationship to go so i think to be built over that period so i think that allows the entrepreneur to get to know us as as a as a business and the people but clearly we get to know them as well see how the business performs We do lots of initiatives to try and facilitate and encourage an entrepreneur to get comfortable with us, recognizing it's a huge step for anyone to make.

19:06So we do. We have lots of events right across the country with the portfolio. It could be by sector, it could be national, it could be regional. There will be a real benefit of introducing into that environment companies, entrepreneurs who are thinking about potentially taking capital from us. And that gives them the ability to, you know, when we first got going and we used to do this, we'd have a national event and bring together a vast majority of our portfolio all in one place, bring in quite a few prospective entrepreneurs who are thinking of taking capital from us. And quite happily say, well, you know, X meet Y, here's a drink, go off and have a conversation.

19:46so we're very happy to be judged by our behaviours my point being that I think just the benefit of having lots of different reference points is really important Is one of the biggest challenges you have persuading businesses to take investment or finding businesses that actually want investment? No it's a really good point I think it is, I think it is and I guess that comes back to we discussed why we were formed and it was very much to grow and simulate the market so so therefore you possibly would expect that to be the case and we did put a lot of thought in at the very beginning in trying to design an offering that would be as attractive as possible to entrepreneurs but still recognizing there had to be a balance to ensure that that would ultimately those investments would deliver a return that was going to be you know commercial and therefore allow us as a business to be sustainable but particularly in the growth part of the business which as I said you know businesses that are not dependent upon future funding rounds they have a plethora of options you know they generally you know these are exciting interesting businesses run by exciting high quality entrepreneurs they will have lots of choices and quite often an option will be to do nothing because they can continue to grow organically they can perhaps do a modest debt raise and they can grow through through other other means or they can just wait and do a trade sale or a majority-path equity deal down the line.

21:12So it absolutely is trying to explain that there's a different path that allows an entrepreneur or a team of entrepreneurs to stay in control, but with some dilution to a minority investor, gives them scalable, flexible capital and support to allow them to go for the longer term. Does that speak to some of the cultural challenges that UK businesses face? as in is there enough ambition is there enough appetite to take on risks i think again i think that is that is a very it's a very good question and you know i could be again in the in the current climate but arguably at any point that definitely exists i think it's not just entrepreneurs just to broaden it out i think it's arguably institutions um many many uh fund managers for lots of and arguably for some good reasons you know perhaps don't have that same level of mission as we might see you know across the atlantic where you've got you know different culture much larger pots of capital and much larger domestic markets to to grow into as well so there's lots of different reasons behind it but that definitely is a challenge we have over the last couple of the years it's been interesting and not i think particularly healthy to see on more occasions now entrepreneurs who've been in dialogue with us who've been genuinely very interested in perhaps taking on capital to go down the path that i just um explained but then ultimately decide to sell to trade so arguably you know not taking the business on longer and further to grow more on the other hand part of me totally recognizes you know the market backdrop for the last you know if you take sort of brexit and you know back eight or nine years you know it's been a really uncertain challenging time so i think entrepreneurial fatigue must play a part in that as well.

23:05But probably even despite that, I think there is something that is more inherent where arguably right across the market. So, you know, entrepreneurs and investors, you know, arguably would benefit from a more ambitious, longer term perspective. As I said at the start of this episode, BGF has invested in more than 600 promising businesses. That gives it a great insight into what it takes to scale up into a large company. So I asked Danny Gregory, what does it take? And how can the UK do more of it given the challenging economic environment? Well, I think that, again, I think it's really a very timely question.

23:44But that is rightly, I think, getting much more focus because, well, I think I've recognition that's hard. I think there's a fantastic sort of entrepreneurial startup ecosystem in the UK. I think arguably lots of capital from lots of different sources backing those businesses. You know, touched on the EIS funds and Angels and, you know, Innovate UK and some great institutions as well, you know, helping to support businesses, BBB, British Business Bank as well. But the challenges of then taking that to the next stage are huge. And the data, you look at those businesses that really do scale and go through that growth curve.

24:30I mean, those are the ones that really then do drive employment growth and all the other benefits that we touched on earlier. So critically important that more of those businesses do break through and grow for longer. So that's partly capital. But my view, I think the team's view here would be, through our experience, is recognising it's more than just capital that's required. Because particularly, inevitably, and this is a good thing in many respects, you've got lots of first-time founders coming through, they can only know what they know. and the benefits of when you can marry that entrepreneurial talent you know the vision the drive but then augment that with seasoned experience that can augment you know executive teams or through the executive as well as well the impact of that can be really powerful but without that it's blooming hard and on the challenges of the last few years you know added to that obviously harder still so so we have and obviously our industry broader industry is focusing more and more on this we from day one we believed we had to be offering much more than just capital hence the value add that we can provide and again we've got the benefit of scale that we can really help in lots of different ways the companies that we support and we have significantly built that over the last 14 years an awful lot of that is people so this is this is not people necessarily in our books, but people that we have a fantastic, you know, thousands of people in our network that we often bring in to help support businesses that we have backed, but lots of other ways in terms of in-house digital skills or IP management or, you know, sales strategy, pricing models, IP management.

26:18So many things, if you've not been there before, it's really hard. And especially if you're an early stage founder with an idea, taking it to market, it's an absolute minefield. So I think helping companies and supporting them, whether it's an investor doing that directly, whether it's regional hubs, sector ecosystems, I think there's lots more that can be done to genuinely help and support companies.

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