Why small is beautiful

British Business Investments has shifted more towards funds operating at the lower end of the lending market in search of better returns, discovers John Bakie

British Business Investments is the commercial arm of the UK government-owned British Business Bank, established in 2012 as part of a government programme to bring together various existing finance interventions under one roof. It became an independent PLC in November 2014.

“Above a certain size, there is a huge amount of liquidity and a consequence is that returns are not always as attractive.”

Richard Coldwell

While the bank has been given a mandate by the UK government to increase and diversify the supply of finance to UK businesses, it has a significant degree of flexibility in how it achieves this. Its subsidiary, BBI, operates as a commercial business and makes a profit, returning an annual dividend to the bank.

BBI’s portfolio is split between direct lending funds for SMEs and mid-market businesses, structured capital solutions, fintech and venture capital equity investments.

It is a strong provider of investment to higher-growth businesses with revenues of up to £100 million ($135 million; €112 million), and one of the key pillars of its strategy is investing in debt funds that lend to UK SMEs, led by director of direct lending, Richard Coldwell.

Not only is it mandated to invest at the lower end of the market, Coldwell says there are also commercial reasons to look at funds which focus on smaller companies. “Above a certain size, there is a huge amount of liquidity and a consequence is that returns are not always as attractive. While there are some excellent managers operating in the mid-market, we see the most interesting return opportunities coming from lending to smaller businesses,” he says.

As a result of this change in focus, its capital committed to SME funds has grown rapidly from £160 million at the end of March 2015 to £306 million at the 2017 financial year-end. Mid-market commitments have declined slightly, though these still represent £855 million of BBI’s commitments. The shift in focus towards the SME segment has also seen it double the number of businesses it supports, from 84 in March 2015 to 168 in March 2017.

While BBI is mainly investing in funds that support the SME space, it has considerable flexibility to invest as it sees fit. It has opted not to support funds lending for property development but does back a range of debt strategies such as senior, unitranche and second lien.

New ventures?

BBI is also open to widening its horizons. While it rules out investing in distressed debt, Coldwell says “venture debt is interesting and we do have conversations around niche strategies like asset-based lending”.

According to BBI’s last annual report, it has 15 portfolio investments in direct lending funds, with commitments of £1.2 billion, of which £706 million is currently invested. During the financial year ending 31 March 2017 it invested in three private debt funds. One was a newly-launched fund, while the remaining two were existing funds where BBI increased its commitment.

Fund managers that BBI has already partnered with include Ares, Alcentra, Beechbrook Capital and Harbert.