KITE Invest met with the London-based British Private Equity & Venture Capital Association (BVCA), the foremost industry body and public policy body for the dynamic British private equity and venture capital arena that accounts for 30% of deal volume across Europe. With a membership that boasts more than an accumulated £500 billion funds under management. KITE Invest discussed the growth and development of this powerhouse industry, and how the UK market’s appetite for the Spanish investment is growing, with BVCA Director General, Tim Hames, noting that, “it is probably one of the first places in Southern Europe that investors will look at again and are looking at, now there is a sense of greater stability.”
KITE Invest: In an opinion piece by you last year, you stated that, “Over the past five years, private equity has invested around £60bn into more than 3,000 UK companies – 90 per cent of which are small and medium-sized enterprises – helping them to grow, innovate and create jobs.” What additional measures do you think can be taken by Public Administration and business spheres in further supporting economic growth during the global recovery from the recession?
MR. TIM HAMES: Well, I think, in part, it is a question of public authorities not doing anything to prevent what which should be seen an as a fairly natural increase in activity anyway, because those figures I sighted over the past 5 years have been over what has been a pretty difficult 5 years for the British and European economy. As a result, there is every reason to think and every reason to believe that if left to their devices those numbers will rise quite significantly over next 5 years. Although Britain is a quite a mature private equity market, the percentage of the British economy that is private equity owned, is probably the largest in the world – it is very similar to United States.
On any given day it might be the first or the second, and that is still only 1.2% of GDP, so there is some room for expansion beyond 1.2%, because 1.2% doesn’t strike me as a natural ceiling. What we see at the moment is a lot of activity in terms of selling businesses that had been held for four, five, six years or longer because the IPO market is now, not only open, but positively “red hot.” Much of that money will go back to investors, but quite a lot of it will be reinvested in a whole new set of companies, so I have kind of hope that if was doing the article again in two years time, I would be saying something more like £80 billion invested in to 4,000 companies than £60 billion 3,000 companies.
KITE: What sectors of the UK do you think boast most potential if you having to site such figures in two years time? Specifically, which sectors of economy do you anticipate private equity and venture capitalists investing in?
TH: Perhaps one that is not as obvious as some of the others or as fashionable, but the whole area of financial services, in terms of how services have traditionally been provided has come up for grabs. I see quite a lot of BVCA members putting a lot of resources behind disruptive, different, challenging entrance to the financial services market and I think that would be a big area. Obviously, at the moment, what is very fashionable, capturing a lot of interest is around the High Technology, Digital Media, E-Commerce,E-Retail type of businesses and that is especially true for the later stage venture capital.
KITE: Following along this line of business sectors, are there any markets you could highlight between Spain and the UK? TH: I think Spain and the UK are sharing a lot of private equity interest around issues different by demographics: healthcare, social care, implications of an ageing population. The UK has until recently been able to partly escape the European demographic challenge of an ageing society by having pretty high levels of immigration for European standards. Britain too will have to consider that some of these questions around longer term care and private equity traditionally has interests in those areas where demographic trends are very strong and pointing in the certain direction.
KITE: The BVCA has had a unique trajectory, from seeking recognition to now providing opinions and advising governmental bodies. As the reaches of the private equity industry expands and deepens, what can be expected in the short term and long term, taking into account the global economy recovery, a growing force from emerging markets and a greater level on interconnectedness?
TH: I think the crucial thing is not only that the industry or sector has grown, but also has normalized. It has become a more the mainstream part of the business community. The fundamentals of private equity are straightforward and been around for very long time; if you look to buy at an attractive price, you pursue a strategy of expanding the business and you look to sell at the right moment, but nevertheless this is easier said than done.
In terms of Spain, most BVCA members are investors beyond the UK, and I think that Spain, in particular, is now attracting serious attention that was not possible two or three years ago. Spain is in a way that Italy and Greece probably are not, because I think there is a perception, a correct perception, that Spain has taken the number of painful measures in order to steady the economy. Also, Spain is a well-developed economy with a highly skilled work force and compared with investments in Northern Europe, Spanish prices are competitively priced. It is probably one of the first places in Southern Europe that investors will look at again and are looking at, now there is a sense of greater stability.
KITE: In a recent article, you applauded the raise in social impact investments and highlighted many of the UK institutions and individuals, including the BVCA that are champions for such types of investments. What measures does the BVCA take to encourage that your members to invest with impact?
TH: We were very much involved in trying to persuade the government that if they wanted to encourage much larger investment in this sector, that they needed to provide the sort of tax relief and incentives that already exist if you want to invest in small businesses, especially in very early stage. There are schemes in the UK called EIS and SEIS, which allow private investors 30% and 50% tax relief respectably, but there was no bespoke equivalent in the social impact space. As of the UK’s budget last month that has been rectified, and now there is a social investment tax relief beginning next year. This means, particularly for high net worth individuals, it is much more attractive now to invest in that space.
KITE: The BVCA has a significant array of communication techniques (the Weekly Brief, the BVCA Journal and the Friday Focus) and clearly values the role of communications. What is the reasoning behind the various communication measures? Are there any remaining challenges within the industry as a result of communication? TH: We have found amongst our membership, as it is typical I suppose of the society at large, there is much more variety in how people like to consume information. Social media thrives on a certain personality and it is difficult for a collective body to have a personality in the funny, thoughtful, ironic ways in order to build an emotional basis of a relationship between the followed and the follower. We have about 6,000 followers on Twitter that compares with perhaps a thousand three years ago, thus we have made quite big strives, but we are constantly thinking about how we could make the message more modern and just find people different ways. KITE: We have discussed the role of communications and events, but could you shed light on how the BVCA, apart from the International series, brings people together as to help facilitate business transactions abroad?
TH: I was in the United States last week with the group of nine general partners, one of whom was a prominent Spanish general partner called “N+1 Capital,” where we basically went to see US investors in three different cities in three days (Chicago, Boston, New York). The objective was to present the collective message about European private equity, as well as, obviously showcase the individual general partners. The striking thing about that exercise was when we did it two years ago, spring 2012, when Europe was still mildly in the recession, profound questions were being asked about sovereign debt, the Euro itself seemed to be under threat, and it was quite hard to get US investors to think very positively about putting more money in the Europe. This time around, there is a much greater level of interest in Europe. Europe might be a bit old and a bit predictable in some ways, but it is actually a much safer bet for US investors than emerging markets, which are inevitably a big gamble – they might work spectacularly well, but they could work absolutely awfully. KITE: Although focused on the UK market, how do you foresee the Spanish market as it emerges from a near bailout situation?
TH: I think on the whole Spain has the relatively positive image across the board. I think the challenge for Spain is always to differentiate itself from a broader picture of Southern Europe that is not as flattering. There is a lot of confidence that the fundamental business infrastructure in Spain is very robust and the business ethics in Spain are admirable. Though there will be some caution before a lot of people throw a lot of money in property in Spain, just as it will be for property in Ireland, given what has happened. I think the mainstream business in Spain is thought to be very solid and probably has room to expand in terms of export potential and that is the route for Spain to raise economic growth quickly by finding more external markets for its strong domestic brands.