Growth Finance: Another Way Santander recently broke off from the consortium of banks that form the Business Growth Fund. Steve Pateman, Head of Corporate, Commercial and Business Banking at Santander, explains to Criticaleye why it pulled out and opted to provide its own ‘Breakthrough’ programme for high growth companies with a turnover of £0.5 to £10 million

www.criticaleye.net 01 Santander’s Breakthrough programme Clearly, a change in government meant a aims to address a recognised gap in the change in ideas. Shortly thereafter, the BBA funding market for businesses with a conducted a series of initiatives looking turnover of between £0.5 and £10 million. at how the banking industry could help The programme’s £200 million debt facility small businesses grow, and from which comprises £50 million from the Government’s the Business Growth Fund emerged as £1.4 billion Regional Growth Fund alongside the centrepiece. For us, as the thinking £150 million from Santander. It contrasts with evolved, the Business Growth Fund looked the Business Growth Fund, a - and sounded like a private equity business; style arrangement backed by , HSBC, another incarnation of . Our view was Lloyds, RBS and , which that the PE market was already well served was borne out of the Government’s Business in the UK and therefore we had a choice to Finance Taskforce. Having participated in participate or not. We made the decision the initial negotiations to create the fund, to break from this initiative and do instead Santander walked away believing there what we felt was needed – establish more of to be a shortage of funding facilities for a debt finance facility for smaller companies high growth, asset-backed companies where the funding is needed the most. that are struggling to obtain credit. Why do you think a mix of debt and equity Why is there a need for the is the best finance solution for SMEs? Breakthrough programme? Our view was that the gap in the SME market Breakthrough consists of growth finance, was around rather than equity. support services and advice, which will focus We know that owners work very hard to on companies looking to grow in all regions develop a franchise and grow their business throughout the UK. We hope this will prove and how they therefore tend to guard their attractive to business owners who don’t wish equity rather jealously. Sometimes debt isn’t to sell an equity stake to outside investors. the answer, of course, but arguably, when you’re looking to evolve your business, to When the financial crisis hit in 2008 the level give up equity is not the answer either. And of risk appetite which had risen inexorably if you see the business evolving and the and stretched capital structures beyond investment being turned into enhanced control suddenly disappeared overnight. earnings in five years time, arguably growth The leverage available to do business, as finance is the right structure to have. a multiple of earnings fell back to around two times; it had been up to around 10 I’m a great believer that there shouldn’t be times – or more if you had asset backing. one common model that you impose on That created two issues: those who already the SME market nor should you prescribe had high leverage could not refinance their one for every business.

Our view was that the gap in the SME market was around growth capital rather than equity

debt, while those who wanted to grow I can think of many businesses that have using debt capital could only access equity. strong asset bases which would benefit from Therefore, many chose not to grow because debt finance because they are producing they didn’t want to give away any equity in sustainable revenue over time and can their business for what they considered to support this type of capital structure. Other be a short-term bridging requirement. businesses that perhaps have less of an This gap in the finance market was identified asset bias would lend themselves more in the Rowland Growth Capital Review in to a higher mix of equity versus debt. 2009. Commissioned by the Government at the time to address this sudden shortage Of course, there’s no stock answer for every in growth capital in the UK market, business. But I believe you should have the the intention seemed to be to create a option to have a piece of equity, a piece mezzanine-style fund structure, while at of senior debt and a piece of mezzanine the same time providing a refinance safety finance, and you effectively blend the mix zone for good but debt-laden businesses. depending on what type of business you www.criticaleye.net 02 have. The search for a panacea formula isn’t how they operate and deal with specific issues. very constructive because it means you often I believe this is a vital opportunity for small end up applying a round-shaped capital business leaders to go into the shop floors structure to a square-shaped business. and boardrooms of these top companies, observe fantastic working practices and gain Lending to debt-laden small businesses valuable exposure to how they do things. In the sounds risky – will you end up losing money? UK we currently take groups to global, class- leading businesses like Google or businesses If you talk to anyone who runs an equity that have emerged successfully through or mezzanine fund you’re unlikely to find similar stages of growth, such as LoveFilm. anyone who hasn’t lost money. While our objective is to get every investment right, Alongside this we offer ‘Breakthough Overseas’ there are things that are out of our control, in which, using the strength of contacts we so it would be naive to think we aren’t going have in countries we operate in, including to lose money at some stage. But if, in five governments and trade associations, we take years time, we still have our capital and growing businesses on trade missions to meet we’ve helped lots of businesses grow then whoever is relevant for their business. We also

[We provide small businesses with] access to growth capital and access to those companies and experiences that will help them to become a better business

the fund has fulfilled its objective; and if the pay for internships and provide funding and market follows our lead, it could transform support for many social enterprises in the the whole UK economy. It really comes down UK. Ultimately, we want to create a holistic to how to you judge success. Although it’s environment for eligible businesses, where an economically viable investment, it’s not they get access to growth capital and access an investment that says we make a return of to those companies and experiences that will x, y and z; rather, if we get our capital back help them to become a better business. after five years, that’ll be a good outcome. What are the limitations of bank support for What else does the programme SMEs and what else do they need to flourish? offer besides growth finance? Well, you can’t do everything, but you can We offer a comprehensive package of provide businesses with capital and the support and advice to growing businesses, opportunities to help them develop. We aim to not just money. One of the key aims of the provide a supportive environment for growing programme was to monitor some of the businesses and work with them through a impacts of running a fast-growth business growth cycle, which has good and bad days, and help the founding individuals translate to really understand their business and help their ambitions, plans and vision across a them deal with the non-financial challenges. wider group of stakeholders as the business expands. We want to protect what’s good In the end we are simply an investor, so the about these businesses, their people and point at which we lend a company money we Steve Pateman Head of Corporate products, and help it to grow safely, but in a become entirely reliant on its ability to run and Commercial and Business Banking way that really helps the owners think about manage its own business. Its relative success will Santander the business and its growth potential. determine whether we get our investment back. However, we understand that management is Steve joined Santander in June 2008 as Head We also provide ‘Breakthrough Safaris’, critical to the success of any enterprise and we of UK Corporate and Commercial Banking and in which we arrange for a group of want to work with businesses as they grow their an Executive Committee member. He is also responsible for Business Banking, underlining manufacturers, for example, to go and see management capabilities and horizons. You the importance Santander places on this sector. some of the best manufacturing companies can’t and shouldn’t run the business for them. in the world, get under the skin of the Contact Steve through www.criticaleye.net businesses and meet senior leaders to see © Criticaleye 2012 www.criticaleye.net 03