The magician who wants to conjure up £5bn
THERE’S more than a hint of frustration in the room as Stephen Welton sets out his vision for giving Britain’s vast fleet of promising start-ups a much needed Boris boost. Welton, who as chief executive of the Business Growth Fund has already driven investment in hundreds of fledgling firms, says more support from the new Government is vital. That and the small matter of at least £5billion extra money.
‘We need a positive tone [from Westminster],’ says Welton, an amateur magician in his spare time, whose entrepreneur-backing fund managed to secure £2.5billion in 2011 from Britain’s biggest lenders including Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered. They were under pressure from the Government at the time to help build up small businesses and boost the nation’s faltering economy after the financial crash.
‘People have got to be prepared to take risks and the tone needs to be more positive and supportive to achieve that.’
As a City veteran and an ambassador for small business, Welton is desperately keen for Boris Johnson’s Government to appreciate the virtues of small and medium-sized enterprises (SMEs) and the vibrancy they can bring to an economy. He was disappointed the focus from all parties during the Election campaign was on spending rather than economic growth.
‘Enterprise doesn’t just happen by accident. You’ve got to have a combination of funding, you’ve got to have support and you’ve got to have the risk-takers who are the entrepreneurs. There is no right we have just to assume that start-ups and scale-ups just happen by themselves,’ Welton, 59, says.
Smartly dressed in a suit and tie at BGF’s offices overlooking Embankment Gardens in Central London, Welton has ploughed cash into more than 300 SMEs, ranging from Trunki – the Bristol-based children’s luggage firm best known for its ride-on suitcase – to the 134year-old Yorkshire bakery chain Cooplands.
He has dozens of investment professionals working at offices across the United Kingdom, from Aberdeen and Belfast to Milton Keynes and Bristol. The company’s research suggests at least £5billion extra – and possibly as much as £12billion – could be invested in small, growing companies every year.
‘The only way this gap is going to be filled in scale is through mainstream investors and big investors, which takes you to the pension funds,’ he says, clearly aware that what follows is a tricky conversation at this point in time.
The nation’s pension funds are heavily regulated and, not surprisingly, the money is not that easy to unlock. So the Government would first have to change the law to enable extra funds to invest in small companies not listed on stock markets. After that, fund managers – still reeling from the crisis precipitated by Neil Woodford – would also need to be convinced.
Hundreds of thousands of small investors were stung last year when the doors were slammed shut on the disgraced fund manager’s Equity Income fund. Woodford’s investment catastrophe occurred in part because he had been pumping funds into small, illiquid companies – some just like those backed by BGF. ‘Woodford is, putting it mildly, very unfortunate,’ says Welton. ‘It’s obviously directly unfortunate for the people investing. But it’s also very unfortunate for the UK because people may now equate unquoted investment with Woodford: “That’s been unsuccessful and therefore we shouldn’t do it.”’
But he adds: ‘That would be throwing the baby out with the bathwater.’
Woodford had a ‘highly concentrated investment portfolio of ten or so companies’, Welton says. ‘So very big bets, very concentrated in a few companies. And if some of those companies had come up trumps, that would have been fantastic. But that is quite an aggressive investment strategy,’ he says, explaining that BGF is different because it has more than 300 very different investments, which helps to limit the risk.
He also believes Woodford fell into trouble because his Equity Income fund was open for public investment.
‘Funding unquoted companies in public markets is not easy. You ideally want to match long-term investments with long-term capital, and that again takes you back in the direction of the pension fund industry.
‘Having said all of that, it would be naive to assume that [the Woodford saga] won’t make things more complicated for BGF. Retail investors who have lost money with Woodford are going to feel pretty sore. And their wealth managers are going to be pretty wary as a result. I actually think that would be a very unfortunate consequence and I don’t think it would be a good decision.’
The potential pitfalls of investing solely in small businesses were laid bare in BGF’s latest annual report, when the firm reported a loss of £50 million. But, as Welton explains, this only shows a fall in the estimated value of BGF’s portfolio of companies, reflecting wider market trends.
Just like a house, he explains, the value is only on paper (or on a screen) – until you want to sell it. ‘At the point you want to realise value, that’s when you find out whether you’ve made a good investment or not,’ he says.
There has been speculation that the banks are pushing for a stock market float of Welton’s own fund, but he is quick to pour cold water on that.
He explains, despite his obvious hunger for new money to invest: ‘If we were to do an IPO of BGF, how much new capital could we raise? A few hundred million – which is a drop in the ocean when we’re talking about a £5billion-plus gap.’