Axial Capital Insights: August 2020

With a tinge of yellow showing in the leaves, it reminds us how quickly this year is going by. The team at Axial Capital hopes it's been a good Summer for all of our clients and associates!
 

Onto business, and whilst increased volumes of funding flowed into businesses and real estate in the recent weeks, it's worth noting where that money actually went. Plenty of growing businesses benefited of course, but within the investment industry substantial sums also changed hands between VC/PE houses as stakes in investee companies were traded and portfolios were rebalanced. This is effectively an investment neutral position for the marketplace, but the positive take from this is the sharpened focus of investment houses, and the willingness to continue to support growing businesses. 
 

 We have been involved in this continued flow of capital across the corporate and real estate space this past month, overseeing placement of credit lines to property lending and vehicle leasing companies, and completing private equity transactions into residential and hotel operations. If you are considering your finance needs, the headlines of what you should think about when raising capital can be seen on our Getting Funded page. We like to share a highline overview of transactions and industry news each month, and here's what we've seen over the recent weeks:
 

 

  •  Growth by acquisition is a good approach to expansion when a company can manage the commercial and cultural integration that comes with it. Presently we are advising 2 firms on post-Covid rollups, negotiating terms on the purchase and contracts, and providing effective capital to ensure successful completion. For clients looking at this approach to growth, our team can answer your questions on financing and transacting on buyouts, including protecting your downside on earn-out performance risk.   
  •  With the bricks & mortar market creaking back into action, co-investment equity and operational growth finance is once again readily available for well structured property projects, generally at £500k+. Two current clients include a hotel that we're assisting through an expansion and refinance, and; a residential development for 20 dwellings in the Midlands which requires both bank lending and additional equity on a value of £8.4m. Additionally, a £25m credit line for a property lender is being finalised as the market reinvigorates at all levels. 

 

 Funding rounds continue with success across the market, with notable completions in July including:

  • A London-based sex therapy app has raised £1m in their seed round!
  • Tandem has secured £4.7m for expaning its digital language training
  • Lockdown increased our awareness of mental health in the UK, and MyHelp has secured additional funding to support its digital solution

 
 

As part of ongoing dialogue with clients on how to raise capital, whether as VC investment or institutional credit, we often come back to the points of preparedness and market traction. To petition an investor for funds, the starting point is a succinct deck or business appraisal that illustrates how you've proven concept and how you've secured revenue streams - and off the back of that discussions can be much more positively focused on how the investment will be structured and transacted. We continue to work with clients to create their investment proposition, and to work alongside them where necessary in achieving revenue targets and successful capital raises.  You can contact us directly if you'd like us to do the same for you.

Using Revolving Credit when expanding your business

Experiencing consistent or even rapid growth can be a challenge for a business operator, as counter-intuitive as that may sound to many, which is where an RCF (revolving credit) can offer a pillar of flexibility in your finance model. We have used RCF’s for clients who have approached us simply to fund the growth they’re experiencing, and where we have led clients through buyouts the RCF has been just as useful in the underlying capital raise. To understand why, we can look at some characteristics of such a credit line.


 

To get the greatest value from a flexible revolver, it works particularly well where a business trades with a regular and reliable customer base, and for growth to be consistent across that customer base. In part, this is because the facility can scale as your level of trading scales, which means your cost of finance is kept in line with the size of your business.
 

We have used this type of money in a variety of situations, including on a buyout of a wholesale company trading at £30m, and to fund growth for a food commodities supplier (we placed private investment in combination with the RCF) trading at sub one million – I make this contrast of business types to illustrate the broad application of this type of money in business expansion.
 

Essentially the RCF is a credit line that lets you draw down capital as trading volumes dictate, and it increases in line with that upward trend in trading, meaning your cost of money increases only when your revenues are growing. That growth can arise more traditionally from organic expansion, though we also deploy RCF funds into leveraged buyouts and structured refinancing when a client is perhaps raising investment from us or needing to re-price their current lending onto better terms.
 

With business sectors being reshaped in 2020 to a degree we’ve not seen for many years, consolidation and restructuring is on the increase, with expansion and acquisition opportunities becoming more ever-present as we move through Q3-Q4. For those businesses looking to take advantage of this Axial Capital is actively placing funds through the remainder of the year where your business proposition is sound. You can submit your deck or funding requirement via email (ventures@axialcapital.co.uk) or through the website directly in the Contact section.
A look at investment in 2020. It’s not just about money.

2019 saw a shape-shift at many points across the innovation and investment spectrum, and the year
ahead already looks to be moving toward more of the same. In the world of fledgling enterprise it can be difficult to meet the costs of getting established in a financial centre such as London, and equally difficult to attract funding for growth if you’re not present and visible in such a centre. Investment houses have become increasingly savvy to this, however. So where will this lead us in 2020?


 

In our VC network we have seen an increasing emergence of region-specific funds, with a focus on taking money and business expertise outside of London and delivering it to entrepreneurs beyond the borders of the ‘Silicon Roundabout’. A case-in-point is a newly launched East-England fund with £100 million ring-fenced for management teams of proven, growing businesses who can demonstrate a road-map of impressive milestones ahead of them. The fund is structured on a patient capital basis to allow those milestones to be fostered and developed to their greatest potential, without the pressure of a defined short-term return-of-capital, and without the need for the business and its team members (often with families and other local responsibilities) to relocate to London. This is an impressive step in the right direction in our opinion.


 

On the same token, founders of young businesses aren’t necessarily making a bee-line for London in the new decade, and they don’t always see value in giving away a controlling stake early on if they can raise funds from their existing network – or if they can boot strap the old fashioned way and recycle profits into their growth ambitions. With an increasing number of quality, invest-able businesses exploring these other avenues for funding it has led firms like ours to put more focus on the benefits
of keeping businesses local. And this shift toward regional fund allocation is a positive off-shoot of this.


 

The title of this article reminds us that it’s not always about money, though. Just as pertinent in a decade that could shape up to be one of greater awareness is the focus on social impact investing. And one of these caught our attention this month. Great strides have been taken by the Trillion Trees Campaign (previously the Billion Trees Campaign until they blitzed through that target), a planet-focused tree planting programme that recently published startling evidence from ETH Zurich University showing that the effects of a decade’s worth of carbon emissions could broadly be reversed if the target number of trees are planted across the world. That number, one trillion. As Axial Capital continues into 2020 with a focus on companies and entrepreneurs that are looking for growth capital and strategic investment guidance, we will also remain conscious of investment choices in our new world.


 

The title of this article reminds us that it’s not always about money, though. Just as pertinent in a decade that could shape up to be one of greater awareness is the focus on social impact investing. And one of these caught our attention this month. Great strides have been taken by the Trillion Trees Campaign (previously the Billion Trees Campaign until they blitzed through that target), a planet-focused tree planting programme that recently published startling evidence from ETH Zurich University showing that the effects of a decade’s worth of carbon emissions could broadly be reversed if the target number of trees are planted across the world. That number, one trillion. As Axial Capital continues into 2020 with a focus on companies and entrepreneurs that are looking for growth capital and strategic investment guidance, we will also remain conscious of investment choices in our new world.

Getting ‘investment ready’ when working from home in 2020

With our current transactions including funding buyouts for multi-million pound digital firms, through to business investment for SME’s that are expanding their current operations, all of our negotiations and investment arrangements have had one thing in common – everyone involved has completed their part of the transaction from home.


The director of Axial Capital discussed this in an article back in May when there was an ever-present pause in seeing deals completing, and investment managers struggled to come to terms with placing funds into a business where they’d never met the owner in person and couldn’t send in an auditor for an onsite evaluation of the core business functions. Only a couple of months on and we’ve seen a marked change with funds now being committed and deployed across almost any sector that can show preparedness – particularly for the remote (and dare I say it, socially-distanced) nature of business through coming 12 – 24 months and beyond.


So if your business levels have stabilised and you’ve identified an opportunity for expansion in the market, how should you approach raising capital? If your funding preference is geared more toward investment or venture finance then treat virtual working like an extension of your office or boardroom – you might not shake our hand in person but in all other respects we want to feel that all parties are fully engaged as though we were dissecting a pitch deck and financials with you across the table. So yes that means video calls (at least at the point of serious evaluation of the funding proposal), and presenting yourself on-screen in the same way as you would if you’d travelled in to meet us at our Embankment offices.


Of course, we’re not sitting across the table reviewing the business case with you, so turning your proposal into the most engaging and illustrative overview of your business can make all the difference. In itself this suggests that businesses that have adapted to offer remote and virtual connectivity for clients will get the most attention (even one of our clients in the used car space has embraced this, enabling virtual tours and negotiations and a delivery service that allows the customer to purchase and receive a car without having left their home. It’s been more successful than you might think!). Whether we’re providing investment or a corporate debt facility, the ability to demonstrate that your business and your market is adapting its sales and service channels successfully will make all the difference.


We believe that this forced adaptation has some truly positive side-effects too, with those previously less able to access traditional commerce (think the booming elderly population with disposable income, and anyone not within commuting distance of a main city or trading hub) now being reconsidered along with everyone else. We’re quick to give honest feedback on submissions, so send us your proposition for funding and expansion and we’ll make time for a discussion.

Buyout Capital for UK Growth Companies

It was only a couple of months ago that businesses watched beyond belief as revenues dived and forward-looking sales forecasts became merely hopeful suggestions. It certainly remains a turbulent time but activity on both the investment side and the client side is now back at pre-crisis levels. The steep discounts that were being applied to forecasts and enterprise value through March/April when agreeing investment terms are now improving, and funds are again being committed for leveraged buyouts and growth-by-acquisition deals (telling us that deals can indeed be executed over Zoom!).
 
So where is buyout capital generally flowing in the current market? We’re placing capital predominantly into established businesses with positive cashflows, either to fund growth by acquisition, or for management to buy the company they’ve been running, and sector wise it remains quite broad as long as the revenue model involves regular cashflows (eg. contracted B2B service providers, where forecasts are less dominated by direct-to-consumer sales or large infrequent sales). It’s about backing opportunities with stable income, for a degree of de-risking against a still unclear horizon.


 

Aligned with this is VC funding that is selectively completing on deals now that the position of existing investments is more stable, with funds going to companies that have proven their business model and their market, and can demonstrate rapidly growing revenues.

Funding the bridging lenders, wholesale.

A day at the Finance Professionals conference recently reconnected me with a bridging lender we’d previously discussed providing wholesale funding for. For most bridge lenders in the market, their loan book is built by their own funds or with funds from their immediate investor network – and this often has limits on the availability of funds for the continual growth of the loan book. Ideally, a lender can access the wholesale funding market for an institutional credit line, just as we’re advising on for this current bridge lender.

Our institutional funding network has remained in strong support of bridging and development lenders – as well as B2B lenders – as long as we can demonstrate a well managed and sensibly leveraged loan book. Ultimately no institution wants to be over-exposed, so we work with bridge lenders to help shape their loan book for the most attractive terms for wholesale funding.

Implicit in procuring an institutional funding line for any lender – whether that’s for a bridge lending, corporate lending, or another provider in the general lending space – is allowing for future growth beyond the initial credit line and considering how to address risk if the preferred facility is capped or rescinded in the future. Where we advise on these scenarios we look at options for a suitable restructuring of the loan book to make it possible to access more than a type of credit line. Ultimately it’s about future-proofing sustainable growth of the loan book.

For institutional and corporate advisory inquiries call or email us and we will arrange to meet and discuss your business further

Coffee with a fund manager

At recent catch-up-over-coffee mornings with a couple of the fund managers we work with, the topic of conversation pivoted around corporate private equity at our advisory arm, and real estate developments of varying types. The travel across town to take my seat at the table affords time to read the business pages in the day’s paper – and to gauge whether news from the coffee table runs either in parallel or in contrast with the editorials of the day. After all, every paper will report its quota of economic and financial malaise!

 

Positively, the drive of those funds to deploy into new investments is still as strong ever, which aligns with the interest we continue to enjoy from investors taking part in the current opportunities at Axial Capital. Granted the positivity will be more lacklustre in some sectors as compared with others (if you’d co-invested with Mike Ashley in Debenhams your stock ticker may not inspire too much confidence at this point..). The point being that, whilst negative headlines continue to hold their share of newspaper square inches, coffee with an active fund manager now and then continues puts a positive light on the general economic undercurrent.

 

My view is partly driven by the current political position of the UK (and to some degree the EU and US), which here at home is as much in the doldrums as its ever been, but still GDP is forecast to grow marginally in the coming years and unemployment remains at record lows – and with new projects continuing to launch with positive interest from joint venture partners and investors alike, it suggests to me that we’re a robust society that will ultimately keep the UK on track in the long term. And that’s something to be upbeat about!
 

On the property front, recent figures show that remortgaging is running well above average, suggesting people are staying invested in their assets, and first time buyers are taking out mortgages at a level that outweighs movers and downsizers. With the Winter lull at an end there was an uptick last month in general SE property sales, and exceptional spurts continued to appear in some of the regional cities. The bottom line is that everyone fundamentally wants to carry on with their lives, their businesses, and their investments, and when I read tomorrow’s downbeat headlines I’ll take comfort that there are just as many good headlines!

Optimistic investor returns?

When we provide development finance for clients, there is quite often a request for equity funding as well as the senior debt, and this brings into frame the potential disparity between the expectations of investors and that of property developers.

As ever, there are two sides to the equation when bringing investor funds into a development project (ie. more than just senior debt), and it is often a matter of finding realistic common ground. An investor who chooses to take an equity stake in a development project is taking on the financial risk that the developer isn’t able, or willing, to take on at that point in time. It’s reasonable for an investor to want their interests to be protected to an extent – and it’s the preferred return we often need to balance with the developer’s expectations on the risk/return profile.

An article we liked is on the following link, and it looks into a recent survey of the investment/return expectations of the broader market, with interesting findings on risk appetite and ROI expectations: https://goo.gl/Pj3L9v

Property Top Co-Financing

Through 2017 we have worked with clients and joint-venture partners on an array of development projects, and whilst most of these have involved us raising development finance & equity for clients, we have also had a number of inquiries for capitalizing fast-growing property development firms at the corporate, or Topco, level. This objective raises a number of questions, both for the development firm and for the investor side.

There is certainly a preference for the majority of funders to appraise and support developments on a case-by-case basis, as when money is ring-fenced and deployed it begins accruing returns (IRR) obligations from the outset. In the mid-size development space, it’s generally more efficient for money to be attached to a single, identified asset, for measurable anticipated results. Accordingly, a good deal of the money that supports those mid-space developments adheres to this funding philosophy.

When funds are being requested at the Topco level, for discretionary use across a broader portfolio of developments/projects, a funder must accept a less precise – and essentially more aggregated – investment dynamic, with generally a longer timeline and a more variable risk profile. Many funders in this mid-size development space opt for a case by case funding model as it allows them to manage their portfolio risk more directly.
Equally, from the perspective of the property firm, the question must be addressed with respect to why they really need or want Topco investment. Doing this will often result in giving away a solid stake in their business, and more poignantly – if the business doesn’t have the equity or asset base to support portfolio-level development, is it really the right time to ask someone else to take the equity risk? The answer may well be yes, and for experienced, niche operators we have seen solid interest from larger funding offices to support that growth – though not without addressing the above line of questioning.

To discuss financial structures to suit your development pipeline, call us on 07718 966556 or email enquire@axialcapital.co.uk

World-class in access to private equity & venture capital

Policy, infrastructure, education, and general ‘attractiveness’ to private equity and VC investors – that’s a description recently applied to the UK in an international evaluation of funding & investment activity.
 
That doesn’t come as a surprise to me in light of the current levels of both equity and debt funding we have access to for commercial and residential property developers. Notably, the value range has remained as strong as ever, with appetite holding at the £5m+ level for the most part, and a draw toward equity stakes and levered returns giving developers as much choice as ever.

 

Furthermore, medium-term horizons are being maintained, with capital for the development of operating assets (care-homes and the like) still looking at 3yr+ tie-ins.

Corporates continue to hedge their bets on the forward-looking operating environment inside/outside the EU, with apparent proclivity toward maintaining some degree of presence in the great city of London whatever the outcome. We continue, positively

 

Putting capital together for property developers

Increasingly when we structure a finance solution for property developers at £2m+ we are drawing on our equity partners to get the client across the line on the overall project funding.
 

As much as people may tout 100% finance (and yes, this is possible – if a very thorough business case is made), the reality is that any investor would prefer to see a developer make some show of financial involvement (just a few percent in many cases) to build a partnership for doing more business together in the future. And this is how we approach business when we source funds for developers – which has had the positive effect of bringing more funding partners to engage with us.
 

The right capital stack is about achieving balance – both in terms of returns and security for investors, and in terms affordability on the cost on the money overall – and we’re seeing this being achieved for more and more developers on some really great developments.