A prominent investment business has said it is keen to do deals in Scotland in spite of the uncertainty caused by the coronavirus crisis amid signs that concern about potential tax changes will fuel activity.
BGF expects to find more businesses with good growth potential in Scotland to back after growing its portfolio in the country last year against a challenging backdrop.
Paddy Graham, who heads BGF’s Central Scotland and Northern Ireland team, said there was no denying the devastating impact the pandemic is having on businesses, especially in the hospitality and leisure sector.
He noted: “Clearly there’s reason to be cautious about how quickly some businesses will be able to achieve or even focus on growth.”
However, Mr Graham said the conversations BGF has been having have given the business reason to be cautiously optimistic, noting: “Whatever the situation, entrepreneurs will rarely want to stand still for too long.”
Mr Graham thinks there will be opportunities for BGF to use its financial muscle to help firms that may think the time is right to use acquisitions or moves into new markets to fuel growth.
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“We anticipate a high level of mergers and acquisitions activity next year, with entrepreneurs acquiring businesses that have been struggling to scale in recent years and are therefore seeking a new home,” he said.
BGF appears to be generating interest among business owners who are reviewing their plans in response to the challenges posed by the pandemic and the potential for it to trigger changes to the tax regime.
The firm has recorded a “sharp uptick” in enquiries in recent weeks from companies either directly or through their advisers.
“Some business owners have pushed back their exit timelines, potentially by a year or two, and are looking to increase the value of their business during this time,” said Mr Graham.
“Others have taken on additional debt and now want to strengthen their balance sheet. We’ve also seen owners seeking a liquidity event before likely changes to Capital Gains Tax.”
It is thought the Government may change the CGT regime to help address the massive increase in public borrowing resulting from the huge spending programmes it has sanctioned in response to the coronavirus crisis.
Some business owners may want to reduce the amount they have at risk.
Mr Graham said BGF had been able to back some really exciting Scottish companies during the past nine months.
Founded as the Business Growth Fund, BGF added a range of firms based in Scotland to its portfolio in 2020 and maintained investment in line with the preceding year, in spite of the downturn in the economy.
The Scottish businesses it backed in 2020 included Calnex, which provides testing equipment used by telecommunications firms, marketing technology specialist MRM Global and Window Supply Company.
BGF invested in Livingston-based Calnex ahead of the firm listing on the Aim market.
Mr Graham said BGF’s readiness to do deals reflected the fact it is willing to take a long- term view.
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The business has set out to differentiate itself from other private equity investors by only taking minority stakes in firms and by being prepared to hold investments for longer than the industry norm of around five years.
A highlight of last year was the sale of the majority of BGF’s holding in Glasgow-based M Squared Lasers. BGF first backed the business in 2012. It invested £6.4m in four funding rounds.
BGF reckons M Squared has grown more than tenfold since 2012.
It sold the bulk of its holding when M Squared completed a £32.5m financing round in November. The new Scottish National Investment Bank provided £12.5m funding, in the first deal it has completed. Santander provided a £20m debt facility.
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The Business Growth Fund was launched in the wake of the 2008 financial crisis with backing from RBS group, Barclays, Standard Chartered and Lloyds Banking Group, which owns Bank of Scotland. RBS group changed its name to NatWest last year.
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