Raising Finance for SMEs
The European Commission divided
INTRODUCTION
It was the European Commission
that first coined the term ‘small and
medium enterprise’ (SME) to
describe businesses which employ
less than 500 workers.
This case study focuses upon the
role of Beeson Gregory, a City
based corporate adviser and stock-
broker, which specialises in serv-
ing the needs of entrepreneurial
and growing companies within the
SME sector.
The importance of SMEs is now
recognised by government as the
principal source of economic growth
as well as employment opportunities.
Access to finance is critical to the
development of this sector of the
economy. Recent investment trends,
both in the UK and world wide, have
focused on larger companies which
has created obvious difficulties. The
study examines the source of finance
and the way SMEs find access to it.
Fran Rooney, CEO, of Baltimore Technologies with the U.S. President and the Irish Prime Minister signing an
inter-governmental communiqué using Baltimore’s security technology.
medium sized enterprises to the economy
SMEs into three sectors:
micro enterprises: those with
between one and nine employees
small enterprises: those with ten
to 99 employees
medium enterprises: those with
100-499 employees.
The European Commission argued that
the significant difference between
SMEs and large organisations is that
they operate in a business environment
of greater uncertainty. A further differ-
ence is their role in innovation. SMEs
play a vital role in the way they inno-
vate quickly in niche markets - such
as technology - and supply alternatives
to the standardised products and
services provided by large organisa-
tions. As a result, they are a breeding
ground for new industries and, as the
‘seedbed’ for tomorrow’s companies,
they provide key investment
opportunities.
Many would
claim that the
key role and
contribution
of small and
unique role in providing opportunities
in the UK is undervalued. For example,
if a number of people on the street
were asked to name any ten businesses,
the chances are they would identify the
well-known corporate giants whose
names appear constantly across the
media. Yet there are more than 3.4 mil-
lion self-employed people in the
United Kingdom and over half the
people in commercial and industrial
employment in the UK work for small
or medium sized businesses.
Nowhere is the difference between
large and small businesses more
distinct than on the London Stock
Exchange, the UK’s stock market for
securities. Like Tokyo and
New York, this is one of
the biggest markets in the
world with an annual
turnover of over
one thousand
billion pounds.
It plays a
Corporate advice
for business organisations to raise the
funds they require for investment.
Market capitalisation is the term used
to describe the value placed upon a
company by the stock market - it is the
number of shares issued by each com-
pany multiplied by its market price. On
the London Stock Exchange more than
95 per cent of market capitalisation is
in the top 100 companies. This means
five per cent of the worth of the corpo-
rate sector remaining contains 95 per
cent of the remaining companies listed
on the stock market.
Beeson Gregory
Beeson Gregory is a service driven
business providing solutions tailored
to the needs of its individual
clients. In recent years, it has
benefited from its niche position as
adviser to European small and
medium sized growth companies.
The firm’s objective is to inform
small and medium sized European
companies on all aspects of
corporate advice. Beeson Gregory’s
key areas of expertise are
divided into:
Paul Sanders, Iain Cater and Dieno George of FSL International Plc, formerly of Seton Scholl Healthcare Plc.
Raising finance
Beeson Gregory provides advice on
various forms of finance, including
floating companies on the stock market
through offering shares to the public, as
well as secondary issues i.e. providing
further finance to existing public com-
panies. Advice is also provided on buying
and selling companies through acquisi-
tions, disposals, take-overs and mergers.
Broking
The Beeson Gregory team provides a
range of stockbroking services that
includes identifying clients’ investment
requirements, opportunities for invest-
ment and maintaining a regular flow of
information between the company and
investors.
Market-making
Market-making involves finding buyers
and sellers for corporate stocks and
shares. Beeson Gregory acts as market-
maker for clients on the central securi-
ties market of the London Stock
Exchange, known as the official list, the
Alternative Investment Market (AIM),
the market for firms that are too young
or too small to be quoted on the full
exchange, as well as EASDAQ (the
European Association of Securities
Dealers Automated Quotation), a pan-
European market for medium-sized
technology companies.
The MacMillan Committee report, in
1931, examined the financing of small
firms and discovered it was extremely
difficult to raise long-term finance in
amounts of less than £200,000. This
became known as the ‘MacMillan
Gap’. Though, over the years, there
have been a number of changes and
opportunities in the ways that SMEs
are financed, it is still the case that
many smaller business owners feel that
they are penalised by markets because
of their size. The concept of the ‘gap’
therefore still exists and it is still more
difficult to raise finance for small
rather than large businesses.
Investing in SMEs
It has been said that a small firm is as
different from a large firm as a ‘cater-
pillar is from a butterfly’. As SMEs
only have a small share of the market-
place, they tend to be price-takers
rather than price-makers. However,
unlike large organisations where
management may often be about con-
trol and organisation, SMEs have con-
siderable flexibility, mainly because
the relationship between the business
and the main investor is very close.
Although the risks involved in invest-
ing in SMEs are greater than for those
of established companies, there is
always the opportunity of larger over-
all returns. SMEs also by their very
nature have far greater growth poten-
tial. Many of the corporate giants today
were, only a few years ago, SMEs
themselves. For example, Seton
Healthcare plc was floated by Beeson
Gregory in 1991 with a value of £20
million and has today through acquisi-
tion and growth progressed into a one
and a half billion pound company,
manufacturing and supplying branded
healthcare and consumer products.
There is a clear link between the
growth of smaller businesses and the
arrival of new technologies. In recent
years, the growth of information indus-
tries has been fuelled by some spectac-
ular successes, particularly in the area
of high technology.
Large institutional investors are fre-
quently attracted to the high growth of
SMEs. Although the bulk of their
investment portfolio is in large steady
companies known as ‘blue chips’, they
often invest in SMEs in order to provide
a more balanced range of investments,
which have potential for
higher growth.
R&B Falcons’ semi-submersible, “Iolair” dry docking
at Cammell Laird’s Merseyside yard.
© Business Case Studies LLP.
Trends in the provision of
finance
One recent trend - management buy-
outs (MBOs) - has led to the search for
better ways of financing SMEs. This is
where the management of the business
is given the opportunity to buy owner-
ship and control of a firm, in the hope
they can improve the productivity of
the business. This has been a key
reason for the growth of venture capi-
tal. Venture capital is risk capital, usu-
ally provided in the form of a package,
to provide investment for SMEs.
Venture capital companies look for
good returns as companies build and
then provide themselves with an exit
mechanism. This is particularly useful
for a business that is expanding rapidly
but is not yet ready for the stock market.
Another area of growth, particularly
for companies that require either start-
up or early development capital, is that
of corporate venturing - large
companies seeking to invest funds in
SMEs. For example, Reuters, as a large
company, set money aside to create a
‘greenhouse fund’ that invests in high
tech companies. By spreading its
investments across a range of exciting
businesses, some of its investment will
be in companies that move on to become
significantly larger and very successful.
There is also a real desire by many
businesses to ‘go public’ and launch
their shares on one of the markets of
the London Stock Exchange, particularly
the AIM or secondary market.
Working hand-in-hand
Beeson Gregory works with SMEs as
both a corporate adviser and a broker.
This enables a close relationship with
shared objectives based upon mutual
support and trust. On the one hand,
Beeson Gregory wants to make sure
the company makes the right decisions,
while on the other acting as a broker
through which it identifies and satisfies
the investment requirements of its
client. For example, Beeson Gregory’s
role might involve:
advising a client on a whole range
of issues such as the appointment
of non-executive directors or the
wording of public announcements
helping to create a link between
investor and client by organising
site visits
producing a prospectus or public
documents and advising on
regulating requirements
raising capital and placing shares
creating a market for shares
through its broking and market-
making facilities
advising upon secondary issues or
take-overs
advising companies on a flotation
and the new issue market
after sales servicing, which
encourages investors to invest in
client companies and keep
companies’ stock liquid
working with other advisers in
helping to take companies to the
next stage of their development.
Airtours vessel “Sunbird” dry docking and refurbishment at Cammell Laird’s Merseyside yard.
A key element of this process is for
Beeson Gregory to help in building
shareholder confidence.
Beeson Gregory also advises on and
project manages private placements
which occur away from the London
Stock Exchange. Beeson Gregory is
active in linking venture capital
companies and corporate venturing
companies with investment opportuni-
ties in SMEs. It also links companies
with ‘business angels’ - high net worth
individuals, family trusts, entrepre-
neurs and enterprises who wish to
invest in SMEs.
Investor relations is also a key role of
the broker. This links the investment
with institutional investors which may
involve arranging meetings for clients,
visiting companies and managing the
share register.
Cammell Laird Holdings
plc
Cammell Laird Holdings plc is a lead-
ing UK company in the ship conver-
sion and general ship repair market. It
operates from a 47 acre freehold site in
Birkenhead in the North West of
England. Beeson Gregory’s involve-
ment with the placing of Cammell
Laird was influential in funding the
expansion of its business. This raised
the profile of the company and its rep-
utation with customers, suppliers and
communities. The placing also provid-
ed Cammell Laird with the working
capital necessary to finance increased
levels of activity and facilitate its EXERCISES
future growth through acquisition.
1 •Provide one example of:
6 Describe what is meant by
Baltimore Technologies a micro enterprise the ‘MacMillan Gap’.
plc • a small enterprise
• a medium enterprise. 7 Describe the recent trends in
the provision of finance for
Baltimore Technologies plc was
small businesses. How much
formed by the merger between Zergo
Holdings plc and Baltimore
2 Identify one difference
between an SME and a large do such trends reduce the
Technologies Limited in January ‘gap’ in provision for SMEs?
company.
1999. Baltimore is a global leader
in E-commerce and enterprise secu-
rity solutions and is one of the leading
3 What is meant by venture
capital? Identify two
8 Explain the difference between
the official list of the London
international providers of information advantages of using venture Stock Exchange and the AIM
security products and services for capital to support a business market. What motivations
E-business through its public key proposition. might organisations have for
infrastructure products (PKI). Security
‘going public’?
is one of the fastest growing areas of IT
spending. Beeson Gregory has acted as
4 What is a management
broker and adviser to the company
buy-out? Explain how a
management buy-out could
9 “The Government should
look at tax benefits in order
through its development as an AIM
be financed. Why might a to reduce the gap in the
company valued at under £20 million
management buy-out lead to provision of finance for
to a company on the Official List
the improved performance of SMEs.” Discuss.
valued at over £300 million.
an organisation?
Summary 10 Evaluate the problems involved
5 What is market capitalisation? in raising finance for SMEs.
Beeson Gregory helps SMEs to over-
come the difficulties involved in
raising funds to finance business activ-
ities by developing partnerships that
lead to a variety of key investment
opportunities for its clients. In a world
where the external environment is con-
stantly changing, Beeson Gregory
assists its clients by providing them
with stability and certainty. At the heart
of this process is an element of trust
which enables Beeson Gregory to work
with other organisations towards
shared objectives.
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