BGF explains: What is development capital?

Development capital is a form of business funding which helps established businesses to grow. It is typically provided by an investor in exchange for an equity stake in the business.

Development capital can enable mature businesses to scale up, increase their revenues and build up their customer base. This guide explains what kinds of businesses may be suitable for development capital.

Where does development capital sit in the funding landscape?

Often referred to as growth funding, development capital is, at its heart, funding provided to a business to allow it to grow and develop. This growth can be achieved through a variety of strategies. These include buy and build, developing new services, and domestic or international expansion, among many others.

Development capital may be a form of patient capital as the primary aim is to ensure lasting growth rather than deliver a quick return to the investor. Some investors of development capital are providers of minority equity investment – this means they make investments in exchange for less than a 50% equity stake in a business.

A minority investment allows the existing management team of a business to continue to drive the company’s growth in the way they want. Development capital investors, such as BGF, often pride themselves on delivering benefits beyond just money. This may include strategic or operational guidance or assistance in finding non-executives for a company’s board.

Some of the providers of development capital are private equity firms.

What kind of businesses are suitable for development capital?

For some businesses at a specific stage in their growth, development capital is the ideal type of funding to take them to the next level. Development capital is generally not the kind of funding provided to early-stage businesses or start-ups – these typically seek venture capital.

Indicators that a business is suitable for development capital include:

• A firm financial footing. Businesses that have a consistent cashflow and are profitable are good candidates for investment.
• A history of previous growth. If you can demonstrate consistent growth over the life of your business, investors of development capital are likely to identify you as a high-potential company.
• A solid plan for future growth. Equally important for businesses looking to secure development capital is a coherent roadmap and targets for growth, backed up by robust financial forecasts.

Is development capital right for your growth plans?

The most suitable companies for development capital are reasonably established with solid plans for growth, but there are a number of factors to consider before deciding on an investor. These include:

• The amount of control you are prepared to give up on decision-making. This will determine whether you seek minority or majority investment.
• The amount of investment required to achieve your growth objectives. Development capital investors may invest between £1-10 million initially. For growth plans requiring more funding, a business may need to consider other options.
• The type of expertise the investor will bring. Industry expertise and connections can make the difference when it comes to executing a growth strategy well.
• Whether there will be the opportunity for additional funding. For growth plans with several stages, follow-on funding can be vital to ensuring smooth progress and hitting your targets.

Development capital from BGF

BGF is the most active investor of growth and development capital in the UK and Ireland for small and mid-sized companies. Our primary aim is to help our portfolio companies realise their ambitions for growth. We’re not under pressure to deliver rapid returns for stakeholders; instead, we commit to partnerships that are as long as businesses need to reach their targets.

BGF is exclusively an investor of minority investment. We never invest to take control of decision-making in the companies we back, rather we provide support and guidance to management teams and let them get on with running the business. We’ve already helped more than 450 businesses with growth funding. With investors in 16 locations in the UK and Ireland, we could be the perfect fit for your business too. Contact our team to discuss how development capital from BGF can ignite your plans for growth.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.