I promised to let IFS readers have a summary of the IBSA discussion group on Tuesday evening on the subject of ‘Growth: Funding the Development of an SME’. As a case study illustrating the difficulties facing entrepreneurs in a world where banks are reluctant to lend money for development opportunities, I asked a Client of mine to lead us through his experiences in the renewable energy industry. My Client gave us a potted history of the legislation for feed in tariffs for solar power, which prompted him to start a new solar energy business in 2010. In just four years since the first solar farm in 2011, his company has now delivered 400 megawatts of power to over 150,000 homes in the UK, and is now the largest solar farm company in the UK.
Initially, he had just eight weeks to find £20 million to pursue his business, and this came from a private equity company which allowed him to set up a large number of solar panels on land already owned. This then attracted external investment including money from pension funds, but sadly no more finance from the private equity company. Moreover, banks would not provide development finance secured on the assets owned by the company in view of the security already held by the private equity company in the form of a floating charge, leaving the Client unable to secure finance against specific assets. With major cash flow difficulties, including a very substantial debt to HMRC for VAT, and without further funds from the private equity company, the company faced severe problems but was rescued by an organisation that was using EIS money to help pay for the construction work already underway. This then achieved the turnover required to repay HMRC and provide further development finance. Ultimately, the private equity company was bought out and further finance achieved, and this has now generated almost £400 million of turnover in the four years since the company started.
The Client is now considering the next stage of finance which may potentially be an IPO but is more likely to be arranging for pension funds to finance the further assets needed to continue generating power for the national grid. Now that the government has removed subsidies for the solar energy sector, the Client is also considering expanding his business horizons, particularly through entering the energy storage market, and it was left to the two other panellists to discuss funding techniques and issues related to future acquisitions.
Richard Feigen stated that the single most important element in securing finance was to ensure that there is solid management working behind development prospects. Initially, friends and family may provide seed finance as they usually require little persuasion regarding management functions, but even strategic or anchor investors at the incubation stage will need to ensure that there is appropriate management in place. Angel funds can range from investment funds to crowd funding at the early stages of corporate development, and peer to peer lending is now gaining popularity although it rarely works for early stage businesses.
Once the business has a positive EBITDA, it can seek to attract venture capital investors and venture capital trusts as these provide substantially more funding. The IPO contemplated by the Client requires a greater level of scrutiny and may not be appropriate for entrepreneurs who need the flexibility of diverting from a stated development pathway in light of changing market conditions, such as has been experienced in the renewable energy sector.
Matthew Stratton stated that as regards acquisitions, this may well be appropriate for the client to consider in order for his business to consolidate and diversify into different areas. It may provide instant access to further intellectual property required for the sector and indeed expand the customer base with a corresponding increase in the PR potential, allowing greater economies of scale to be achieved. Acquisitions may certainly encourage further finance to be available, and may attract the interest of larger companies within the sector.
Questions were then asked by the members who attended the meeting (there were approximately 75 registrants for the evening) and these ranged from financing issues, intellectual property issues and general business strategy. As regards IP, the Client explained the technological advancements in remotely controlling electricity usage through software development, and explained that the scope of IP development in this field is enormous.
Crowd funding was discussed, but it was explained that brokers don’t usually wish to get involved in crowd funding and there may well be issues with supporting legal agreements. However, retail bonds issued by the company may be an alternative way of attracting small investors. Both crowd funding and retail bonds may require a higher cost of capital, as will mini-bonds, and as a result pension fund money is considerably cheaper. As had been explained at the meeting, private equity funding may be an alternative source of finance, but may come with complex legal issues which could affect the growth of a company.
The meeting ended with me thanking the panellists and all the attendees, as well as our hosts Ince & Co who then sponsored drinks on a terrace overlooking the Tower of London for the next couple of hours of enjoyable networking. I did mention to the attendees that all of the discussions that we had covered would be worked on in greater detail at the IBSA annual conference on 19th November at The Landmark Hotel London. The title of the conference is ‘Issues Affecting the International Development of SME’s’ and will cover financing, tax, economic, intellectual property and business strategy issues. For those who wish to have further information please visit the IBSA website (click here).
Also, the website will show the various discussion group meetings being held over the next couple of months which are open to all IBSA members. Our meeting in Paris on 29th October will discuss the continued use of countries such as Luxembourg and Switzerland in international business structuring following the action plans delivered by the OECD in its BEPS project (which will be discussed between Philip Baker QC and me in a webinar on 23rd October); on 5th November we will be holding a meeting in Lisbon to discuss investment into African markets through countries such as the UK and Portugal; this will be followed by a meeting in Zurich on 1st December on the topic of ‘Residence Planning and Exit Strategies for Entrepreneurs’; and the next London branch meeting will be on 3rd December on the topic of ‘International Business Structuring for Family Offices’.
I do hope that you enjoy reading our IFS newsletters, and it would be really nice to hear from you with any comments you may have.
With kind regards