US moves in to fill funding gap

US investors are muscling in on venture capital houses as small UK engineering companies continue to look beyond the stock market for finance. `Whenever we look at disposals, people say “what about the US?”,’ says Sukhbinder Heer, corporate finance partner at Robson Rhodes. `Previously, they went to venture capital houses, but now US buyers are […]

US investors are muscling in on venture capital houses as small UK engineering companies continue to look beyond the stock market for finance.

`Whenever we look at disposals, people say “what about the US?”,’ says Sukhbinder Heer, corporate finance partner at Robson Rhodes. `Previously, they went to venture capital houses, but now US buyers are pipping them at the post.’ Heer puts the change down to a booming US stock market and the perceived flexibility of UK labour markets.

But venture capital companies are still interested in engineering, he says. `Venture capitalists are still targeting engineering, but there has to be a `play’. For example, the pressings industry is a consolidation play because it is so fragmented.’

Michael Davy, director of NatWest Equity Partners, says venture capital firms are still investing where large stock market investors fear to tread. `If the pension funds have to put effort into researching businesses, it’s more cost effective to research one large one than lots of small ones. There has also been a move to investing in Europe, with investors looking at the largest companies in each country,’ he says.

Investor interest in small firms has diminished over the past five years, says Davy. `It is now much more difficult to float small companies. That creates an opportunity.’

That opportunity has been taken up enthusiastically by venture capital groups such as 3i and NatWest. The £171m Mettis Group was formed by 3i from eight aerospace and medical engineering businesses bought from National Industries Group of Kuwait. And NatWest funded an £87m management buy-out at automotive parts maker Concentric last year.

While Mettis and Concentric may be small compared with the likes of British Aerospace, they are still larger than venture capitalists are used to. `A few years ago, we were typically dealing with companies worth about £10m. Now we are up to about £200m,’ says Davy.

As venture capital companies and US investors take up the slack from the City, they may lose interest in the smallest companies on their lists. The British Venture Capital Association says its members will not abandon the smallest firms as long as they offer strong growth prospects.

But private-sector venture capital firms are generally unwilling to invest less than £250,000. In this case, the new regional venture capitals funds – led by the Regional Development Agencies – may be willing to help. The funds, which are intended to provide low-cost capital to small firms, should be in place by the end of the year.