We need a new approach to make growth capital work for SMEs

Small-medium enterprises (SMEs) have held firm through the worst of the COVID period.

Loan and rental payment relief combined with government initiatives including JobKeeper and Boosting Cash Flow for Employers, among others, have combined to help boost businesses’ balance sheets and curtail requests for additional funding.

In fact, recent data from the Reserve Bank of Australia (RBA) shows lending to SMEs changed little from pre-COVID numbers.

But as the economy comes out of hibernation and we aim for that V-shaped recovery, we cannot expect SMEs to rely only on traditional banks to finance their next stage of growth.

Re-igniting the economic engine is going to require a different approach.

 

By Anthony Healy
CEO & Managing Director, Australian Business Growth Fund

 

SMEs Left Hanging

Australia has so many incredible businesses with endless potential and a clear vision for the future. These are the business owners who have carved out a competitive advantage – often over many years. They can see down the road toward their new manufacturing facility, an expansion into a new geographic market or the pathway to take out a key competitor.

The problem is that these innovative businesses have had few options when it comes to securing the funding required to make those plans a reality.

Traditional banks are simply not designed to take a punt on step-change growth. Debt funding alone can only get an SME so far – it ups the stakes for business owners and too much of it can limit a business’ flexibility.

While private equity firms have the appetite for larger, riskier deals, their ambitions for a controlling stake don’t align with the goals of most SME owners. And many SMEs are simply too big or don’t have the growth profile to attract venture capital.

The Australian Business Growth Fund (ABGF) was setup to plug this critical funding gap: namely by providing patient growth capital tailored to the unique needs of SMEs. Founded as a public-private partnership between the Federal Government and six leading banks, the $540 million fund enables businesses to grow without taking on additional debt or giving up control of their business.

This model is a game-changer for high-growth SMEs, particularly in terms of accelerating the post-COVID recovery.

First, having the financial backing of the Australian Government as well as ANZ, the Commonwealth Bank, the National Australia Bank, Westpac, HSBC and Macquarie, the Fund has the dry powder required to make a material impact on a large and diverse group of SMEs. On a per deal basis, we will invest between $5–15m of growth capital in exchange for equity. Furthermore, as a for-purpose fund, our success will be judged not only by the returns we deliver to shareholders but also our indirect impact on the broader economy and the overall health of the SME sector.

Long story short: we’re in this for the long haul.

To that end, we’re also committed to ensuring business owners retain control over what they’ve built. Entrepreneurs and business owners pour their hearts and souls into their businesses, so we understand that the last thing a founder wants is to give up control when the best is yet to come.

That’s why we’ll only ever seek a minority stake in our investments.

There are a few stats that illustrate just how unique this approach is for our market. In 2019, in Australia alone, more than $2.24 billion was invested in venture capital deals, with another $15.8 billion in private equity buyouts and a staggering $56 billion in business loans.

How much money went toward minority stake growth capital to SMEs? Just $340 million.

Given that are more than 1.3 million SMEs, many of which are looking to move quickly post-COVID, we see a huge opportunity to put the pedal to the floor.

Partners in Growth

ABGF is built around the idea of long-term partnerships. We’re backing the founders and entrepreneurs who have the passion, experience and tenacity to take their business to the next stage. That’s why we provide more than capital alone.

Few founders would say they have all of the connections and advice they need to succeed. The reality is that building a business is a lonely game. Being able to access premium talent and expertise is crucial to navigating new challenges and making the most of tailwinds.

As part of our investment, we connect every founder to our Talent Network of seasoned directors and functional experts. With our model, founders will use this network to appoint a Non-Executive Chair who will leverage their business and industry expertise and deep networks to open doors and provide strategic advice and guidance to the founder.

Tried and tested

The ABGF model is unique, but not unproven. In fact, it builds on a similar initiative that has been running in the U.K. since 2011. The UK Business Growth Fund (BGF) has invested $2.7 billion in more than 390 SMEs across a range of sectors, with more than 72 exits. Its team meets with thousands of companies every year and made one investment a week on average in 2019.

By replicating the best of this proven model, we see ABGF as a critical catalyst for growth in the SME sector, connecting founders and entrepreneurs to the capital, expertise and wider networks they need to succeed.

COVID has provided all of us with an opportunity to pause and consider the way forward. Let’s ensure we don’t miss the opportunity to rethink the way we support the critical SME sector – it’s for the benefit of all of us.

Can ABGF assist your business?

At the Australian Business Growth Fund™, we provide long-term growth capital to enable SMEs to scale without giving up control of their business. Start the conversation with us today.