UK venture firm moves into lending

Octopus Investments has moved into providing finance for small- and medium-sized businesses (SMEs), alongside its traditional venture capital operations.

Since the onset of the credit crisis, SMEs have found it increasingly difficult to access credit from their normal providers, many of whom have scaled back their lending or – as is the case with alarm system supplier CSL Dualcom’s bank – have disappeared altogether.

CSL Dualcom, for which Octopus backed a management buyout in 2006, had banked with Icelandic bank Kaupthing Singer & Friedlander, which collapsed in October. Octopus, which had until recently only been an equity investor, provided £2.65 million (€2.97 million; $3.75 million) of flexible debt refinancing to the company in the form of a five-year, interest only loan.

Octopus has allocated £40 million of its Venture Capital Trust (VCT) money to the new SME financing product named ‘Breathing Space’. VCTs are UK vehicles introduced to encourage individuals to invest in small businesses by offering significant tax breaks to investors.

Octopus is not the first VCT manager to provide debt finance to SMEs. “For the last four years, we have provided loan facilities and refinancing options to companies that are well known to us, and where our investment can be secured on freehold assets,” said Colin Corbally, investment director at Downing Corporate Finance, a London-based VCT manager.

“This is a particularly busy area at the moment, as banks have become increasingly difficult to deal with,” he added.

Octopus’ Breathing Space will not compete with existing specialist providers of venture finance, such as Noble, Kreos Capital and ETV Capital, which tend to lend to VC-backed business in earlier, often pre-profit, stages, according to Stuart Nichol, director at Octopus.

Octopus’ product targets more established businesses with historic annual sales of £7 million and strong recurring cash flows.