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Global Britain: fact or fiction? Exporting the BGF model to China

Stephen Welton, executive chairman of BGF, recently delivered a speech by video link to the 2021 Annual Conference of Financial Street Forum, held in Beijing, China. These are the key points he shared with delegates.

 

The reason BGF was created and is thriving today is based on a simple premise: trying to do something different. When we think of innovation we normally think about intellectual property, research and development, and great scientific breakthroughs. Britain continues to show its enormous abilities in this respect, most recently with the Oxford-led vaccines response. But innovation can and, for a country like the UK, needs to be delivered in services which are the predominant economic activity in a knowledge-based economy. Combined with the soft power of UK diplomacy, wonderfully illustrated by the Queen recently at the Global Investment Summit, as a country we should up our game by raising our horizons and ambitions. That is something we are very alive to at BGF.

We exist to provide entrepreneurs and small to medium-sized growing companies with patient capital delivered as a minority partner, together with the financial investment, expertise and connections they need to help realise their potential. Our success over the last ten years gives us confidence that we have an investment model, a programme and a way of working that is applicable not only in the UK, but in other economies too, and may well be of interest to a country as large and diverse as China. Our knowledge and expertise has led to the establishment of BGFs in Canada, Australia and Ireland with more to come. This is based on our ability to help translate our investment model so it is fit for other parts of the world, galvanising support for entrepreneurs and helping to power innovation. It is this sort of expansive thinking that we will need to drive the global push on reaching net zero, for example, by sharing good ideas, building partnerships, and fostering strong relationships. To me, that is a practical interpretation of what Global Britain means.

Clearly, the UK is a much smaller than China but there are similarities in the makeup of our economies. I would argue that the bedrock of both economies are not the very largest companies, which in the UK we find in the FTSE 100, but are rather the millions of small businesses dotted across the country run by families, entrepreneurs and small business founders. They are the lifeblood of the economy, offering employment and creating wealth. They are the engine of both aspiration and growth.

We have analysed the UK market’s roughly 6 million small to medium-sized enterprises, which in a population of 70 million, and with a working population of just over 30 million, shows just how significant they are in terms of numbers and impact. But what’s even more interesting is the subset that lies within which we call the growth economy. These are the companies that are growing fastest. They are at the forefront of innovation, research and development. They are the businesses that will create the future wealth and prosperity of the UK, operating not just domestically, but also internationally.

Out of the 6 million companies, we’ve identified between 20-30,000 of these faster growing growth economy businesses. Our focus at BGF has been how to reach, to talk to, to invest and support these companies. This will be the same challenge the world over.

BGF’s model

Over the last ten years, we have carefully built a large regional investment business. We now have 14 offices across the UK and two offices in the Republic of Ireland. We are within 50 kilometres of every one of these 20-30,000 growth companies because we believe proximity matters, both in terms of supporting local communities and building relationships. In ten years, we’ve met well over 10,000 of these companies, and we’ve established a clear picture of what it is that they need to succeed.

Firstly, they need support in the sense of strategic advice, support at board level to help them make decisions, support in the form of networks to open doors and create greater access and – perhaps greatest of all – support in building and scaling an organisation, which many of them have not done before. To deliver this support we have built what we call our Talent Network, a grouping of more than 6,000 independent directors from all sectors right across the UK and Ireland – the largest grouping of directors in the country.

When we combine that support with meaningful financial investment, the results can be dramatic. BGF has now backed over 400 companies. That makes us the largest growth capital investor in the world by number of transactions. We have invested over £3 billion, while ensuring that our average investment remains below £10 million initially, because our objective is to help lots of companies both directly with investment, and indirectly with support and signposting to others. This is diversification in terms of scale, thought and execution.

We have already exported our model to three other countries. We began with Ireland and have now helped to set up operations, on the BGF model, in both Canada and Australia. We believe our model acts as a beacon for other nations, and is an example of how a national investment platform, delivered on a local basis, can help small and medium-sized businesses grow. We believe this is an opportunity that might also exist in China and our ongoing engagement is testimony to that.

How we made BGF a reality

We were able to bring together the key counterparties to deliver BGF in the UK, which I would argue is a template that we will see increasingly going forward as public and private partnerships are forged in a host of different areas. That started with the government, which used its convening power to assess the problem and identify the opportunity. That opportunity was delivered by the major British banks, the shareholders and owners of BGF. They have contributed over £3 billion of capital and have been able to do that through enlightened regulation, which has made it possible for them to do so, a clear sense of purpose, and a strong, investment-led approach.

This collaboration between government, major banks, investors and entrepreneurs has created a powerful ecosystem. Essentially, what we have done is reinforce the power of equity, buying stakes in companies and investing for the long term, giving them the ability to grow. That equity base makes these businesses more robust and better able to plan for the long term while dealing with short-term issues.

If we look back to the last 18 months, and the experience of the Covid-19 pandemic, the performance of our portfolio has been remarkable. Facing a significant challenge both economically, politically and financially, our investee companies have thrived. They have done so thanks to a combination of wider government support to the economy as a whole, and because of the support of investors, which has given them stronger, better-capitalised balance sheets that were better able to sustain them during the downturn as well as helping them continue to invest for the future.

We don’t aim to replace bank debt. We think equity should support bank debt. The great financial crash of 2008-10 exposed the danger of relying on bank debt alone to fund companies. What we have done in the UK is to strengthen the ecosystem by providing equity investment.

Cusp of a revolution

As we now emerge from the pandemic, we are looking ahead to the future. I believe the UK stands on the cusp of the next Industrial Revolution, which will be a technology revolution. That will involve environmental innovation to help the country achieve net zero greenhouse gas emissions. It will also mean more investment in life sciences to deal not just with the current pandemic, but with the future health needs of an ageing population around the world.

BGF will play a crucial role in this revolution, and we think our model is applicable elsewhere too. In a country like China, a combination of regulation, government support, and participation by the major financial institutions can come together to provide equity investment, designed and delivered on a long-term basis, to provide fuel to growing small and mid-sized businesses across the whole of the country. This model can produce wealth and prosperity, promote innovation, and create a diverse economic and business ecosystem.

This green revolution cannot be funded on credit, it must be led by equity investment. BGF is one such model, but we need others. For example, what would it really take to turn AIM into the Nasdaq of Europe? Britain really does stand at a crossroads, with a strong heritage in both global trade and finance. What is to stop us reaching out around the world?

 

BGF Insights 11.25.2021
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