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Insights

Lockdown shopping = millions in investment

A few months ago we saw the headlines that the online local supermarket service Weezy raised £15m in their series A, and in the recent week Turkey-based Getir raised substantially more to become (yet another) unicorn in the sector. There’s no question that fast-scaling service oriented companies will be ongoing beneficiaries of investment in the months and years ahead.


An investment we recently evaluated at Axial Capital is gaining ground in this space, though not in the UK market. AOW is the brain-child of an American ex banker who is now firmly rooted in Thailand and expanding his on-demand and ‘online only’ grocery service across Asia. Dressed up as a supermarket service, these businesses are ultimately logistics plays and it’s the Amazon-like technology and distribution network that serve as the driver of value and defensibility. Plus enough capital to make a quick run at securing market share of course.


Fairly simple at conceptual level – select your chosen items on an app and shortly after have a bicycle delivery rider arrive at your door – scaleup businesses in these virtual convenience sectors are adding another line to the national output ledger, and creating jobs where more redundant sectors are inevitably trimming back headcount, at the same time as giving you and I the ability to redefine how we operate on a personal level. We see a positive period of evolution ahead, something we’re excited about.

Investment Exits a la Covid

At times of high economic uncertainty, investment activity and property development can stall as buyers retreat to the sidelines looking for bargains, while sellers are reluctant to ink a deal that may look cheap ‘if’ the market out-performs in 2021. 


COVID-19 created both unprecedented uncertainty and practical obstacles to dealmaking. Global lockdowns suddenly meant it was impossible to meet in person, develop relationships or to kick the tyres of a business and get a feel for its people, culture and operations. Despite all this, when the strategic rationale is strong and a target performs well, attractive exits can still be achieved. 


We can look at two distinctly different investments to illustrate the impact and the opportunities: a real estate development, and a SaaS enterprise scale-up. Let’s start with the SaaS business, a cloud-based HR engagement and performance software package, that experienced an unexpected growth curve as employment and working models saw a dynamic shift in 2020.


They say it takes 66 days for a habit to form. As a society we’ve had much more time than that to adapt to working or running businesses in the Covid environment, and this led to greater adaptation and utilisation of software – including HR management packages. Similar to the story of Zoom, valuations have seen an uptick for software packages that provide structure and simplicity to the currently fragmented working model.


Timing and the investment horizon were evaluated in the usual course when the VC backers of Clear Review funded the SaaS HR firm on its A Round. But when a strategic acquisition by Advanced, the UK’s third largest software company, was presented as a profitable and chance exit, that exit came early. And at the stellar level of 75% IRR for the VC. Many firms and funds have been dealt a blow by covid, by way of some portfolio companies running at full burn-rate but seeing their market take-up abruptly halted, but the right positioning can have quite the opposite result.


Looking at the dynamic shift from another perspective, structured finance to support residential property development must be taken with both a long and short view on the impacts of covid. In the short term there is uncertainty in the market and those with good experience of sourcing and developing good land sites are able to capitalise on the current opportunities. By the very nature of building and selling real estate the horizon to completion and exit is at least a medium term out look – by which time all parties to the project should expect that economic volatility in the UK is less uncertain, and demand for housing will not have subsided. This is exactly what we’re seeing currently, with our network of investors showing strong support for those developers who present a strong property development proposition.


Whilst existing plans to build businesses over longer periods, to be positioned as a strategic target for a larger consolidators in the marketplace, the pandemic had rapidly accelerated and refocused many sectors and has created opportunities for attractive exits, much earlier than envisaged. We may all be indoors this month, but there’s a silver lining of optimism out there.

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.

Venture financing reaches an all-time high for Q1

2021 is shaping up to be a stellar year for fast-growth companies in Europe. Investment into European growth companies reached almost EUR20 billion in the first quarter, roughly double any quarter of 2020. Funding at every stage was up, with late-stage funding growing the most.


Whilst we’re not great supporters of ‘unicorn hunting’, as there’s a plethora of brilliant, innovative businesses out there that will achieve great success without the coveted billion valuation, new unicorn counts in Europe grew all the same. A record-setting 16 new unicorns were coined in a single quarter. In the whole of 2020 just 15 new European unicorns joined the unicorn board.


These current numbers account for 11 percent of all unicorns globally, and the amount of capital raised in the first quarter was more than EUR7 billion.


Early-stage funding  is also at an all-time high for European startups, with total volume up 62 percent on the same quarter last year. The number of early-stage growth companies that received funding was also up, indicating that it’s not just the select few chart-toppers receiving the bulk of the money. The capital markets remain strong, and for companies with a good track record of growth that capital is more accessible than ever.


UK/Europe-based medical and biotech companies have had a good start to the year, with some significant transactions in the digital health and bio/pharma sectors. At Axial Capital we are completing A rounds and pre-IPO financing rounds for two growth companies in the MedTech space, with buy-in from the UK/EU and from North America remaining strong.


Q2 is under way at a good pace, and the good run for innovative growth companies looks set to continue!


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.

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.

What we learned about coffee (and investment) in Sicily

Whilst one of our current investment rounds is to fund a FoodTech company in Brescia in Italy, the recent week was spent in the sunnier climes of Sicily. There was a sense (surprisingly so) that life is progressive in Sicily – buses and trains run on time more than they do in London – though at the same time the sense of tradition is never far away. This could be seen at the most local level through the Sicilian coffee culture.
 

Some 90% of coffee bars in Italy are independent, resulting in there being just 100 group or chain coffee brands across the country last year, in contrast to the chain/corporate culture we see in the UK and US. Italians are quite happy with this economic model, at least in terms of cultural preservation – and as Axial leads two clients through corporate buyouts this month it draws attention to the question of when is an industry more or less suited to group structures? 
 

The matter of coffee chains in Italy is as much a cultural issue as it is economic – and interestingly enough it’s driven in part by a 1911 government decree on espresso price caps, which brought about a deep-set belief by Italians that the brew should remain affordable – but for many clients looking at growth by acquisition the various means of value accretion should be evaluated independently and objectively to avoid being distracted by headline numbers. For example, buying revenues that are underpinned by sustainable contracts is not the same as buying revenues that rely heavily on a proficient and continually active sales team. The same can be said for attributing value based on an adjusted EBITDA as presented by a vendor, versus an impartial adjustment of that same EBITDA.
 

This month we have sourced investment and growth capital for businesses in the education sector and in the FinTech space, both for corporate roll-ups, and in each case value through these roll-ups was identified through varied and quite different channels. There is value today (such as through margin enhancement), and there’s value tomorrow (such as through increased enterprise value based on substantial and sustainable revenue amalgamation). The devil is in the detail of course, and would take up more space than this coffee-break piece will allow for!
 

  •  The MedTech industry was a rapidly evolving sector even before the onset of this year’s pandemic, but now more than ever it’s creating value both for company founders and for end users – and it’s on this strong footing that we are advising a surrey based digital pharmacy on a small-cap public listing. With growth on the minds of most business owners, it’s great to see the public markets supporting UK talent at all levels.   
  •  Food food food. It’s what the days of lockdown seemed to revolve around for many of us. Luckily we really enjoy food – plenty of it and easy access to it, and that’s why we’re taking an active position in two growing FoodTech companies to provide investment and board-level support. With UK & EU expansion plans, it’s an exciting Q4 for these companies as Axial provides the capital and board level governance to support continued growth in 2021. 

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

  • Point Pickup Tech raised USD30m for its final-mile logistics operations
  • Leeds based Meatless Farm completed another multi-million funding round
  • Axial Capital confirmed a debt/equity facility for a developer to complete a £3.3m housing scheme in Suffolk

The tone amongst many business owners at present is one of ‘head down, carry on’. In light of uncertainty around government positioning (and frequent repositioning), many investors and company founders have been reminded to focus on the long game – ultimately building a business should be seen as sustainable, it’s a long term labour of love.  With this in mind, we help clients everyday with developing and executing their investment proposition and you can contact us directly if you’d like us to do the same for you.

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

A case-study of development finance cross-collateralisation

Over the past 6 months something we’ve had requests for, on a number of occasions, is cross-collaterised development finance facilities, where developers will undertake a number of separate developments – but they want a pre-agreed funding arrangement to cover all the proposed sites. The facility size in each case has been in the region of £3m – £5m.
 

Positively, we’ve structured good solutions to each of these. In the case of multi-site residential projects we’ve seen good support with well-priced debt funding and even profit-participation agreements, and; on commercial developments with good tenant pre-commitments the joint-venture equity funding lines have been quite attractive.
 

All in all it suggests the positive market metrics, such as the recent RICS growth predictions, are carrying through to the marketplace – and to the developers we provide structured finance for.

Axial Capital Funding 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.

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.

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

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