British Business Investments: Addressing the SME funding gap

British Business Investments’ Richard Coldwell talks to Hannah Gannage-Stewart about supporting SMEs through the investor’s private credit portfolio…

As the man at the helm of British Business Investments’ (BBI) debt fund portfolio, Richard Coldwell (pictured) has a unique insight into debt finance for small- and medium-sized enterprises (SMEs).

Coldwell was there at the outset in 2012, when the global financial crisis prompted the coalition government of the time, led by the Conservatives’ David Cameron and Liberal Democrats’ Nick Clegg, to carve out an initial £100m for investment in small businesses.

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After some successful early projects, BBI was established in 2014 as one of the commercial subsidiaries of the UK’s first development bank, the British Business Bank (BBB), which was primarily focused on investing in debt structures.

It brought together around £1.5bn of existing programmes and presented a solution for businesses that could not otherwise attract investment.

Then, much as now, private banks were retrenching from lending in what came to characterise the whole era as ‘the credit crunch’. The objective was to support alternative lending in a bid to plug the sudden bank lending gap.

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“Our portfolio has broadly reflected the growth in the private credit market in the UK,” Coldwell says. “We invested in some first-round mid-market direct lending funds and some of these teams are now raising their sixth and seventh funds.”

Back when those initial investments were made, the government accepted there was a need for investment in mid-market funds, but as time went on the feedback from politicians was that there was an additional need; to support smaller companies.

BBI was established to meet that need. It begun by funding asset finance providers, a couple of debt funds focused on smaller companies, and a £20m investment in Funding Circle, which is now a commercial lender but started in 2010 as a peer-to-peer lending marketplace that enabled the public to lend directly to SMEs.

12 years on, BBI still has a £1.5bn portfolio and remains focused on SMEs. Coldwell says the business still has some exposure in the mid-market due to those early investments but does not make new investments there. “We continue to invest in a range of structures that support alternative lending, the nuance is that we are focused on the smaller end,” he says.

Read more: Alternative lenders and private debt funds fill SME funding gap

“While the broader alternative market has become established, and larger managers are now raising multi-billion funds and successfully utilising international capital. At the smaller end, capital continues to flow less easily to structures that are supporting SMEs and lower mid-market companies.”

Now, the largest part of the BBI portfolio is credit funds. “We also provide structured capital where we provide capital to smaller lenders and we invest in some of the challenger banks, as well as investing on a small number of fintech platforms, but the largest part of what we do is in funds,” Coldwell explains.

Those funds make up around 70 per cent of BBI’s balance sheet, with structured finance and platform lending occupying the remaining 25 per cent. “It’s interesting that the mix of the initial £100m is still broadly the same as the portfolio that exists now”, he says, reflecting on an initial £100m allocation of capital that pre-dated the formal establishment of BBI.

While the BBI’s portfolio mirrors the mix of investments it started out with, Coldwell is clear that the variety of lenders within that has evolved. “’Funds’ is a very glib description,” he says. “The only constant within that is that the fund is taking institutional capital on one hand, and lending in some way to a company on the other.

“Alternative credit has prospered due to the bank retrenchment process, which is a structural issue. This seems likely to drive further growth in future years.”

Other parts of the BBB, he says, are primarily focused on policy issues, supporting businesses during the pandemic for example, or funnelling money to the regions.

“What BBI is trying to do is to deliver an appropriate risk-adjusted return for government,” Coldwell explains.

“We are mindful that we are ultimately government owned, and we are only operating in parts of the market where capital doesn’t flow freely to companies. We seek to highlight the opportunities that exist for investors at the smaller end of the market. We are prepared to support first time funds for example but only where we are comfortable that we can get an appropriate return for that risk.”

Perhaps partly because the BBB, and its subsidiaries, were born out of the financial crisis, Coldwell says it does not make investment decisions based on macro trends. Asked whether the protracted hike in interest rates or relative uncertainty relating to this year’s election influences BBI’s operation, he highlights the long-term nature of BBI’s investments, which are generally anything between three and 10 years.

“We have been an investor in private credit for a number of years now and so we are looking to maintain a steady investment pace, because we feel that that will give us the appropriate diversification across the different years of the economic cycle,” he says.

That said, Coldwell acknowledges that a key theme to emerge since the high interest rates that followed the pandemic is greater difficulty in fundraising across the board. With a balance sheet of approximately £1.5bn, BBI is a modest player in the context of the broader market but, among its target market of SMEs, Coldwell emphasises that it remains a significant and much needed entity.

It is an environment in which SMEs are likely to remain underserved, as fund managers building assets under management are unlikely to favour multiple small investments to smaller companies when the economies of scale are more favourable in the mid-market.

Does he worry that an incoming Labour government might curb operations? Coldwell’s sense is that, given markets don’t always work as efficiently as is ideal, governments of all persuasions will want to support the economy. And as the BBI has the ability to generate a commercial return while also achieving policy outcomes, it should be something that will continue to have cross party support.