By Justin Nevison-Grainger, Director, Conatus Financing Solutions
Over recent months, the opportunities open to cash-rich directors and entrepreneurs to directly invest in other local businesses have become more available and attractive.
They can seek a return and apply their relevant knowledge and experience, whilst at the same time being close enough to keep a discerning eye on the performance and conduct of the companies and directors they are investing in. All this is made all the more interesting and appealing when cast against the backdrop of the business economy nationally and the combination of circumstances and events that have taken place.
Firstly, rarely have we seen the shocking collapse, or insolvency voluntary arrangements, of so many big names in which investors might have traditionally placed their faith, and the hard-earned cash generated from their own businesses. The list is extensive, but to name a few are Sir Philip Green’s Arcadia Group and the Patisserie Valerie bakery chain, chaired by highly respected entrepreneur Luke Johnson.
And for those preferring investment products over direct share investment, the shrunken value – reduced by £560m in under four weeks (source FT 30/5/19) – and liquidity of Neil Woodford’s flagship investment fund, or the collapse of London and Capital Finance, where mini bond holders may lose £236m (Source FT 22/3/19), suggest a chilling caution.
Secondly, there is a combination of adversity to risk capital lending by banks. The need for proven businesses to invest in productivity, expansion and diversification of markets in uncertain times, means that bank funding is often either unavailable, or the burden of immediately servicing the interest and repayment of such debt unwise for the underlying viability and security of the business.
For these reasons, more SMEs are offering other companies, local directors, entrepreneurs and other high net worth or investment sophisticated individuals, the opportunity of directly investing into their businesses; by way of Equity Capital (shares with potential dividends and / or value uplift on the sale of the business) or Mini-Bonds (fixed interest and repayment at a pre-stated time).
Some companies have attracted investment through Equity Crowdfunding platforms, but these companies are often distant from the investor. Therefore, the local knowledge, due diligence and close critique of the management team, or valuation, can be remote and difficult.
As a result, we are seeing more local businesses seeking local directors, entrepreneurs and other wealthy individuals who can strike a relationship and an understanding through direct investment and some level of ongoing (sometimes hands-on) practical advice. In fact, through the HMRC Enterprise Investment Schemes (SEIS & EIS), the government has been very helpful in encouraging such arrangements between SME businesses seeking investment and investors, with generous tax reliefs against income tax for investments – potentially equating to 30 to 50 percent. It is also giving protection from other tax such as capital gains on subsequent value uplift, or even relief on investment failure.
As part of our ‘business funding certainty’ proposition, we at Conatus are increasingly linking our business clients with local cash-rich directors, entrepreneurs and others seeking these types of opportunities.
Justin Nevison-Grainger is Director and the Co-Owner of Conatus Financing Solutions and CrowdFundMe2. Contact Justin on E: email@example.com or T: 07799 803605