British Business Bank Growth Loans Pilot Delivering Help to Grow 26 th March 2015
Content Welcome and Introduction The Evidence Base: Research Findings The Growth Loans Pilot Application Process and Next Steps 2
Today s Speakers Patrick Magee Dan van der Schans Judith Ozcan Mark Hambly Welcome and Introduction The Evidence Base (Research Findings) The Growth Loans Pilot Application Process and Next Steps Chief Operating Officer Economist Market Insight and Analysis Managing Director Lending Solutions Director Lending Solutions 3
Our Approach Start-up Scale-up Stay strong 4
Programme Offer Start-up Scale up Stay strong Mentoring and funds to be your own boss Funds for high growth potential More funding options and choice of provider Up to 25k for people wanting to start their first own business 6% interest Delivered through Start Up Loans Company and delivery partners Co-invests alongside angel syndicates on commercial terms Venture Capital EC approved for bigger investments and funds Ability to help close good quality funds Growth Loans Request for proposals launched 18 March 2015 Investment Programme 250m of awards to new platforms, debt funds and asset based lenders Enterprise Finance Guarantee Guarantees to extend banks risk appetite where security is insufficient Enable Capital focused guarantees to grow small bank lending Capital markets funding for smaller asset based lenders Referrals Smaller businesses rejected for loans from major banks given opportunity to be referred to other finance providers. Request for proposals launched 18 March 2015 5
Impact Our programmes are already delivering results First guarantee issues under the Enable Programme 25th March 2015 Source: British Business Bank, December 2014 6
Growth Loans: An Exciting Opportunity A new product utilising the flexibilities of the Bank We start from a researched and evidencebased approach to understanding the market As we work through the market we have issued a flexible RfP which allows us to structure a range of potential solutions, by either providing capital or guarantees We are commercially-minded and focused on best value but we recognise the challenges in addressing market gaps We look forward to engaging with interested parties 7
Content Welcome and Introduction The Evidence Base: Research Findings The Growth Loans Pilot Application Process and Next Steps 8
Demand for Growth Finance is Increasing Business confidence is rising and investment is forecast to grow Demand for finance is moving away from working capital towards investment and growth 46% of businesses want to grow 69% of businesses with 50-249 employees want to grow Real business investment following the last three recessions Source: Office Budget Responsibility (2014) Economic and Fiscal Outlook, December 2014; and British Business Bank, Small Business Finance Markets, 2014 9
Research Methodology We undertook new primary research in 2014: 34 qualitative interviews with banks, private debt funds, smaller businesses and business advisors Consultations with overseas Development Banks to review growth loan scheme features Quantitative assessment of market supply and demand to assess whether a funding gap exists. We have now updated and published our research (spring 2015) 10
What is a Growth Loan? Bespoke debt-based finance that goes beyond senior debt in terms of risk appetite and higher pricing Supports growth in businesses that have limited scope to raise additional senior debt due to risk or lack of collateral Mezzanine finance is a type of growth loan, which shares some of the characteristics of equity finance Source: British Business Bank (2015) Analysis of the UK Smaller Business Growth Loans Market 11
Confidence Understanding Awareness What is the Potential Demand? Limited use and awareness of growth finance amongst SMEs: Less than 0.5% of all SMEs have used mezzanine finance in the last 3 years 15% of smaller businesses are aware of mezzanine finance with 5% aware of a specific supplier Analysis of UK firms suggests that there are 16,000 growth SMEs which: Are at least 3 years old Have a turnover of 1m or greater Have experienced annual turnover growth averaging 5-20% over three years Potential Demand: Up to 1bn Of these around 500 SMEs per year may seek growth loans Source: British Business Bank (2014) SME Journey towards raising finance (BMG Research) and British Business Bank (2015) Analysis of the UK Smaller Business Growth Loans Market 12
What is the Current Supply? Significant new entry in private debt midmarket Smaller number of private sector funds providing SME growth loans - minimum deal size is c. 5m A number of publicly backed funds provide funding up to 5m Other sources of funding include VCTs and private lenders Some specialist provision from banks, mostly focused on larger deals Total 2014 supply of growth loans in the region of: 60m for loans < 2m 260m for loans < 5m Source: British Business Bank (2015) Analysis of the UK Smaller Business Growth Loans Market 13
Coordination Cost Track Record What is the Market Gap? Some growth orientated businesses are unable to raise finance A funding gap exists for smaller businesses seeking finance in the range of 0.5-5m but particularly for deal sizes up to 2m A number of market failures exist which restrict the supply of growth loans: High cost of due diligence for smaller deals Asset class has lack of track record Coordination failures also exist The funding gap is liable to increase in future as demand for finance increases Estimated Annual Funding Gap 200-900m Source: British Business Bank (2015) Analysis of the UK Smaller Business Growth Loans Market 14
Contents Welcome and Introduction The Evidence Base: Research Findings The Growth Loans Pilot Application Process and Next Steps 15
Pilot Objectives To increase the supply of growth loans to eligible SMEs with growth potential To test partnering and financing structures to inform potential roll-out of a future wider programme To demonstrate that this market segment offers a viable investment opportunity and is able to attract private sector capital 16
Target Outcomes More Lending To have facilitated provision of a minimum of 160m of additional finance over a 24 month lending period Better Interventions To have tested different models of participation through a number of different partners and to have an understanding of the pros and cons of each Deeper Knowledge To have developed an understanding of provider, borrower, investor and wider market demand 17
We Work Through The Market Fully Capitalised Providers of Growth Finance Partially Capitalised Provision of Guarantees and Capital will be complemented by broader development of the growth finance market Support by providing Guarantees Shared first loss with fee payable Support by the investment of Capital On either Pari Passu or Unmatched terms Enhancing Risk Appetite / Growing Capacity / Increasing the Flow of Capital For example: Standardising transactional documentation Building awareness for growing SMEs on financing options ADDITIONAL Lending to eligible SMEs 18
Guarantees: Expected Parameters Other innovative structures may also be considered, subject to compatibility with BBFL s remit and the relevant State Aid regulations 19
Capital Investment: Expected Parameters Examples Maximum BBB Participation Pari Passu Structure 50% of Fund 20m Unmatched Structure 40% of Fund 20m Return to BBB Identical to that to Private Investors. Priority return (as interest on balance of investment in fund) offset by reduced share of up-side benefit. Repayment of Capital Identical to that to Private Investors. Possible prioritised repayment. Other innovative structures may also be considered, subject to compatibility with BBFL s remit and the relevant State Aid regulations 20
Assessment: Criteria Proposals will be assessed against eight criteria: LENDING TO / INVESTMENT IN ELIGIBLE SMEs LENDING/INVESTMENT SCALE & TENOR LENDING/INVESTMENT STRATEGY ORIGINATION SYSTEMS & PROCESSES GUARANTEE STRUCTURE & INVESTMENT RETURNS COMPATIBILITY WITH BBFL REMIT MANAGEMENT TEAM & TRACK RECORD LEGAL STRUCTURE, REGULATION & TAX DOMICILE 21
Assessment: More Detail (1) LENDING TO / INVESTMENT IN ELIGIBLE SMEs UK SMEs with t/o < 39m, preferably < 25m Track record of growth (5-20% pa over 3 years) Viable growth plans Strong management teams Unable to raise sufficient senior debt SME eligibility subject to State Aid requirements LENDING/INVESTMENT STRATEGY Ability to provide growth loans 0.5m- 2m Lending products with flexible repayment structures, including deferred interest Primarily a debt-based return, but with mechanisms for sharing in potential upside LENDING TO / INVESTMENT IN ELIGIBLE SMEs LENDING / INVESTMENT STRATEGY 22
Assessment: More Detail (2) LENDING/INVESTMENT SCALE & TENOR ORIGINATION SYSTEMS & PROCESSES GUARANTEES: Lend min. 10m during lending period CAPITAL: Investment of 10m- 20m from BBB alongside at least equal private investment Ready to lend late 2015/early 2016 Lending/investment period of c.24 months Maximum loan term of seven years Track record of originating and completing growth loan deals Has robust and comprehensive credit assessment, lending and monitoring arrangements Able to report in a timely manner 23
Assessment: More Detail (3) GUARANTEE STRUCTURE & INVESTMENT RETURNS MANAGEMENT TEAM & TRACK RECORD Can clearly set out return expectations and explain impact of BBB participation Clear pricing to SMEs GUARANTEES: Intended Rate, Cap and Fee CAPITAL: Pari Passu or Unmatched, expectations of investors, returns structure CVs and references Evidence of delivering as a cohesive team Has mechanisms for addressing any shortfalls Reputation and integrity Evidence of skills necessary for delivering growth finance 24
Assessment: More Detail (4) COMPATIBILITY WITH BBFL REMIT British Business Finance Ltd facilitates access to finance for young and high growth SMEs on either a commercial or aided basis Case-by-case consideration of compliance with State Aid: GBER / de minimis (cf. RfP Section 4) LEGAL STRUCTURE, REGULATION & TAX DOMICILE Transparent and appropriate structures Ethical approach to lending Appropriate authorisations and permissions held Use of Guarantees must be appropriately structured for regulatory purposes EU schemes, such as Innovfin, are compatible with our State Aid remit and offer an interesting opportunity. We are exploring the possibility of becoming a counterparty, simplifying access for UK institutions 25
Contents Welcome and Introduction The Evidence Base: Research Findings The Growth Loans Pilot Application Process and Next Steps 26
Application Process: Transparent, Robust Expression of Interest Initial Discussion I II III Formal Proposal (by invitation) VI Award V Assessment and Due Diligence IV Management Presentation Completion Commitment and Drawdown Lending VII VIII Lending 27
Timeline Lending will flow through 2016 Borrowing SMEs repay over 5-7 years following drawdown No final decisions will be made while the RFP is open RFP Closes: 30th June 2015 2 nd Half 2015: selection and sign up of partners Guarantee fees apply throughout life of loan RFP Launched: 18th March 2015 28
What Do You Need to Do Next? Read Review Request for Proposals (RfP) which is available at: Register Your Interest by 30 th June, 2015 BBB will then invite you to submit a short paper addressing each of the assessment criteria, in order to provide the basis for a discussion. Register Your Interest growthloans@british-businessbank.co.uk Ask Questions: growthloansquestions@britishbusiness-bank.co.uk Further Questions? Ask Us If your question is of wider relevance we will publish it, along with our answer, in an anonymised form for the benefit of all interested parties at: www.british-businessbank.co.uk 29
Thank You for Coming We look forward to receiving your Expressions of Interest Any Questions? 30
British Business Bank plc is a public limited company registered in England and Wales registration number 08616013, registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. As the holding company of the group operating under the trading name of British Business Bank, it is a development bank wholly owned by HM Government and is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). British Business Bank operates under its own trading name through a number of subsidiaries, one of which is authorised and regulated by the FCA. British Business Finance Ltd (registration number 09091928), British Business Bank Investments Ltd (registration number 09091930) and British Business Financial Services Ltd (registration number 09174621) are wholly owned subsidiaries of British Business Bank plc. These companies are all registered in England and Wales, with their registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. They are not authorised or regulated by the PRA or FCA. Capital for Enterprise Fund Managers Limited is a wholly owned subsidiary of British Business Bank plc, registered in England and Wales, registration number 06826072, registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. It is authorised and regulated by the FCA (FRN: 496977). British Business Bank plc and its subsidiary entities are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found at. BBB 011214 22