Funding Options for Growth

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HNH Group

Northern Ireland companies are increasingly changing their attitudes towards alternative forms of funding. Traditionally growth funding came from a mixture of company profits, grants and bank debt. Now, more than ever, companies are looking towards Private Equity, Venture Debt, Mezzanine Debt and Asset-backed finance to fund growth.

Whilst company profits are the safest way to fund growth, this is quite often not sufficient to allow businesses to take full advantage of market opportunities. In turn, the changing landscape of banking and grant funding has meant other forms of finance are increasingly required to achieve the desired ‘funding stack’.

Private Equity (and its subset of Venture Capital) has been established in Northern Ireland for many years. Local and international funds have backed a number of the economy’s fastest growing and most successful companies (Heartsine, Andor, Lagan Technologies, Ben Sherman and BCO Technologies to name a few). However, private equity has traditionally been regarded locally as only suited to earlier stage tech companies. Whilst this has never been the case, more traditional SME businesses are now evaluating Private Equity as a growth financing tool. We have also seen an influx of GB-based Funds looking for investment opportunities. This increased supply has also stimulated awareness in alternative funding sources locally.

Mezzanine debt (‘Mezz’) has also received more attention recently. A hybrid between debt and equity, it carries characteristics of both forms of finance. Whilst acting like a debt instrument with repayment and interest structures, the funding is preferred to equity. It will have a higher risk profile, due to the level of security and the structure, and thus attracts higher pricing than senior debt. This ‘top slice’ debt can also hold convertible rights, allowing the funding to convert to equity under agreed terms.

HHCF are currently working with a number of Mezz Funders, including US Funds who wish to deploy funding in Northern Ireland. Mezz funding can be more attractive than Private Equity as there is less dilution for existing shareholders. However, the projected growth that is being financed must be sufficient to manage the higher debt costs associated with Mezz – it will not suit all business models.

The new Invest NI Growth Loan Fund will provide loans of between £50k and £500k. It is expected that these will have a mezzanine structured element to them on the basis that they are ‘top slice’ debt. Braveheart Investment Group plc and NEL Fund Managers Ltd have been appointed to manage the Fund and it will be operated locally by Clarendon Fund Managers.

Venture debt is a more specialist financing option, specifically aimed at venture-backed companies and provide by specialised lenders. Unusually venture debt is available to start-ups and growth companies with funders potentially securing the debt on the Company’s IP. Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default.

Companies are also increasingly taking advantage of Asset-backed financing and Commercial financing. The main banks can provide these forms of funding and increasingly specialist lenders are appearing in this space to service demand. There are a number of new local providers who offer a range of working capital and growth funding options.

Companies focused on growth can utilise a mixture of these funding structures. The correct balance of debt, equity and grant will appropriately financially structure the business in terms of leverage and risk. Transactional funding in M&A is also being influenced more by the various sources of funds available locally. Structuring is as important as valuing when completing a transaction. The wrong structure will put as much pressure on the business as paying too much in the first place. This is also true for Growth Funding. No matter which sector or size of business, companies need to assess heir options to ensure they match the correct provider and structure with heir funding needs.

Craig Holmes can be contacted at