Now’s the time for high-growth companies to raise funding

There has probably never been a better time for high-growth Irish companies to raise funding. Between resumed bank lending, private equity, venture capital, the Enterprise Investment Incentive Scheme (EIIS), and other alternative sources of funding, the environment is very positive indeed.

“There has never been as much money out there,” says Capnua executive chairman Paul Keenan. “It’s fantastic. The NTMA’s Irish Strategic Infrastructure Fund (ISIF) has made a huge difference. You don’t have to go to the UK any more. There has been a complete transformation. You can get funding of up to €25 million here without having to look elsewhere. There is a genuine capital market in Ireland now.”

Katharine Byrne, corporate finance partner with BDO agrees: “The market is prime and ripe with a great diversity of funds. There is a lot more sources than ever both domestically and internationally and the funds are flowing primarily into high-growth companies. The banks are also under pressure to increase loan books.”

David Tynan of PwC points to private equity funds such as Cardinal Carlyle and MML, venture capital firms such as ACT and Delta, and specialist quasi-banking concerns like Bluebay and Broadhaven as being among the key players in the market. But the key questions are how to strike the right balance between debt and equity and how to go about getting the money.

That balance tends to be dictated by the development stage of the company and the nature of its business. “For early-stage technology companies, equity is usually best,” says EY corporate finance partner Graham Reid.

“Debt is more suitable for well-established companies with good levels of cash flow who are looking to take the business to the next level. In general, with debt you have to pay back the money and that is not really suitable for early- stage businesses. Bank debt is not suitable for risk. For this reason, equity is the better option for early stage businesses in the tech, life sciences and fintech sectors.”

Cost of funding

Conor McKeon of Cantor Fitzgerald points out that the cost of the funding comes into play as well. “Bank debt tends to be most cost-effective for companies depending on their cash flow and their position on the development cycle,” he says. “You have to ask how much debt a company can sustain. Earlier-stage companies can’t support that much debt and equity is usually the best option for them.”

He explains that senior debt from a bank costs about 4 per cent to 8 per cent depending on the level of risk involved. Mezzanine finance, which is a form of junior debt and is therefore a higher risk to the lender, is coming in at between 10 per cent and 20 per cent, while equity finance tends to cost more than 20 per cent.

That high price might be worth paying when it comes to equity, according to Deloitte corporate finance partner Anya Cummins. “Early stage businesses won’t really be able to get debt finance,” she notes. “But equity finance can give them the ability to scale the business and offer a lot more value than they could get if you didn’t give up some of the equity. It will allow businesses grow faster and in a lot of cases will add more value than they have given up.

“You can make a higher return with a smaller share if you choose the right partner,” she adds. “The private equity funds have a lot of expertise in growing companies and can assist in areas such as marketing, the professionalisation of management, and internationalisation of the business. Going from small to medium is a big jump and the private equity companies can help you do it quickly.”

Barclays Bank Ireland head of product and business development Brian Delahunty echoes this point. “Many companies are often reluctant to dilute their ownership of the business through taking additional equity capital,” he notes. “However, as well as providing the capital required, a key advantage of private equity is their ability to bring contacts and commercial or strategic expertise at a key growth point for a business.”

‘Business plan’

The other issue facing these companies is how to get their hands on the money. “Funding is available to the right businesses with the right business plan,” says Graham Reid. “But everyone is looking for the ideal investment and you’ve got to kiss a lot of frogs before you find that. The starting point is the business plan. What does it look like from a financial perspective? If you had more money could you accelerate the growth of the business? What could you achieve with it, and how would you deploy it?”

The ability to tell a compelling story about the business is also important, according to David Tynan. “You have to show that the business can survive and is on top of its sector or industry. It’s a difficult story to tell if you are not able to do this. If you have the best widget in the world it doesn’t matter if there’s no market for it.”

According to Katharine Byrne, the range of choice can actually present problems in this regard. “SMEs and high-growth companies are slightly at sea with the number of options open to them and high-growth companies normally don’t have time to analyse the market properly,” she explains. “It’s moving swiftly. Loan term sheets are changing all the time. There is no longer such a thing as a standard term sheet. Entrepreneurs should be excellent at selling their own products and services, not at analysing term sheets. It is important to bring in advisers to help understand the options and arrange the finance.”

Conor McKeon points to one other source of early-stage finance which might be attractive to high-growth companies – the EIIS which replaced the old Business Expansion Scheme (BES) in 2011. “Early-stage equity finance is typically provided by friends and family but one very useful form of capital for early-stage, high-growth businesses is the EIIS. It was launched four years ago and raised €90 million in capital last year. We have been involved in three deals in the past year in the brewing, whiskey distillation, and telecoms sectors for a total of € 10 million. We have helped firms raise € 23 million overall since 2011. The great thing about the EIIS is that it allows the owner the ability to retain the equity in the business at the end of the investment period.”