Restricted access to funding and skills can quash the life of an SME. The Australian Business Growth Fund is helping such businesses to overcome those challenges.
Pictured above: From left, Brett Moore (NAB), Anthony Healy MAICD (ABGF), Jenefer Stewart (ANZ)
“The two biggest limiting factors to SME growth in Australia are access to funding and to the right sorts of skills,” says Anthony Healy MAICD, CEO and managing director of the Australian Business Growth Fund (ABGF). “We set up ABGF as an innovative way to overcome these challenges.”
ABGF is a public-private partnership between the federal government and six leading banks — National Australia Bank (NAB), Commonwealth Bank of Australia, Westpac Banking Corporation, Australia and New Zealand Banking Group (ANZ), HSBC Bank Australia and Macquarie Group.
“ABGF was incorporated in October 2020 to fill a clear gap in the market for long-term, patient growth capital for SMEs,” says Healy. “The UK’s Business Growth Fund is a similar model and I saw an opportunity to bring that to Australia. ABGF is now the only purpose-built growth capital fund dedicated to the SME sector.”
ABGF injects $5m-$15m of capital into growth- ready businesses with revenue of between $2m and $100m for a minority stake of up to 49 per cent. This can be used to support strategies such as expansion into new markets, new product development, mergers and acquisitions (M&A) and succession planning.
“As patient investors, we don’t expect a return in year one or two — we’re in for the long haul,” says ABGF director Kee Wong FAICD, an experienced director, entrepreneur and investor, who chairs the AICD Governance of Innovation and Technology Panel and sat on the AICD board for seven years. “We’re also not interested in taking the majority of the business. Our mandate is that we are a minority shareholder, but significant enough to influence the way the business grows.”
More than funding
While capital is fundamental to growth, Healy sees it as the key to a door. “Once you open that door, you find a need for other kinds of support. The skills and capabilities that got the business to this point aren’t necessarily those needed to move it to the next level. Our talent network of experienced business leaders, strategists and finance professionals helps us to bring capital, capability and connections together.”
A primary function of the network is to provide a governance uplift. “The directors of companies we invest in are typically the people who founded the business,” says Wong. “Unless they’ve had training or experience elsewhere, they’re generally unfamiliar with what it means to be a director in terms of directors’ duties.”
Once the partnership is in place, ABGF helps the SME to assemble a board with an appropriate skill set and appoints a chair. “This will be someone who has grown their own successful business before, has industry experience, or is well-placed to mentor the management team on strategy and governance,” says Healy. “We take a seat on the board, so we have full visibility of the business.”
The talent network is able to plug capability gaps. “The most common gaps are in finance and strategy,” he says. “We can help SMEs to overcome the many other challenges businesses typically face in making the transition from small to medium, or medium to large. They have opportunities to tap into the networks and connections we all have as individuals.”
Presenting the best case for funding
When considering funding, the first thing ABGF looks for is evidence of a solid business. “We want to see that you understand your market and how to compete there,” says Wong. “We want to see your revenue, profits and any losses. Losses aren’t necessarily a problem if you understand how they occurred and how the right support can turn them around. From an investor perspective, we want to feel confident your business is sustainable, with identifiable opportunities for growth.”
Some business owners who approach ABGF are staggeringly unprepared. “You’d be amazed how many founders want capital, but are not sure what they want it for,” says Healy. “Others don’t even have two years of profit and loss, cash flow and balance sheet statements. On the other hand, those that present a compelling, sustainable, competitive advantage with realistic growth upside are very attractive investments.”
He encourages founders to be clear about how involved they want to be in the day-to-day operations, and for how long. “Aligning with founders and their future role in the business is critical, particularly when discussing the exit strategy,” he says. “Some want to step back and play a lesser role, which is fine, but understanding that helps us decide how we invest and what is the level of investment that they need.”
Can SMEs look to M&As for growth?
Many businesses expand by M&A. Is now a good time to be looking for this means of growth?
“We’ve had a couple of relatively slow years, but activity in mid-market M&As has now increased,” says Andrew McFarlane, deal advisory partner at BDO in Australia. “We expect this to continue as we get more visibility on where interest rates will land, narrowing valuation expectation gaps between buyers and sellers, and parties no longer wanting to wait it out on the sidelines.”
Local and overseas private equity funds have continuing strong interest in funding ambitious SME founders and management teams who are keen to expand via M&As. “Australia is recognised globally for the strength of its home-grown talent across technology, particularly software,” says McFarlane. “Demand for companies in this sector from investors is ever-increasing.”
Holly Stiles GAICD, national head of corporate finance at Grant Thornton Australia, finds that for new investments, private equity firms typically focus on established, profitable businesses with upwards of $3m in EBITDA, although many have higher minimum thresholds.
“In the mid-market, these firms usually seek to invest between 40 per cent and 70 per cent in a partnership-style deal alongside existing management and/or the business owners,” says Stiles. “Significant competition for quality businesses is prompting private equity firms to adopt a more flexible approach, particularly when they’re adding to existing portfolio companies.”
The most attractive targets are likely to be SMEs growing within a growth industry. “Investors are looking for quality earnings with recurring revenues or long-term contracts and relationships, a strong brand and IP or point of difference, a strong management team and a situation where the owner is not integral to the business,” she says.
From an SME point of view, Stiles advises owners to consider cultural fit and alignment in their business vision.
“They should get to know the individuals involved with the investment and spend time discussing strategy and plans for the business,” she says.
McFarlane believes the key to selecting the right growth partner is ensuring expectations are aligned on future strategy, in terms of opportunities to pursue growth, exit pathways and timings.
“Picking a party that brings complementary skillsets, strong networks and industry experience that can be leveraged to accelerate growth of the business is important, especially when moving into new markets,” he says.
This article first appeared under the headline 'Survive then thrive’ in the October 2024 issue of Company Director magazine.
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