This Article appeared in the Business Money Magazine 

HOSKYN CHILD INTERNATIONAL

Having spent the last 10 years in corporate recovery and assisting in the funding of business turnarounds, Hoskyn Child International Limited (formally The Project Partnership) is specifically looking to address the problem of the traditional gap in funding for business i.e.: The Equity Gap.

Whether you are a Factoring company, Bank etc you will recognise that a large percentage of your clients - as with ours - suffer from constriction of initial working capital or equity investment capital specifically in the area of between £200,000 and £2,000,000.

Solutions to working capital requirements offered by traditional bank funding in the form of an overdraft facility usually only address part of a client’s working capital requirement and often from a risk point of view cannot be extended much beyond £100,000 - £250,000 Even given Business Development Loans supported by the DTI backed Loan Guarantee Scheme these often fail to provide the level of working or development capital that a large number of businesses require. 

Forced to look elsewhere for an injection of funding, companies often look to the venture capital route, only to find that either the entry level of funding is too high i.e. minimum investment of £2,000,000 + or with the smaller funds that they are industry or technology specific. In addition, many of the smaller VC companies or funds are also confined geographically to specific locations restricting again the availability of lower equity investment into the business. 

There is therefore often an equity funding gap, which falls between two stools of traditional bank funding and the entry point for typical Venture Capital Funds. This therefore precludes a high percentage of potentially successful companies from investing sufficient monies at the front end of a venture or project.

HCI works closely with a chosen number of experienced Venture Capital, Banking, Factoring and Institutional Finance companies to put together flexible funding packages to address the needs of business. These packages are provided most commonly for restructuring of existing companies financial requirements or for start-ups following MBI/MBO takeovers. Funding for expansion, acquisition and growth is a particular speciality and is normally in conjunction with existing funding arrangements, however we believe we have also solved the problem of The Equity Gap through our new MBI Equity Fund.

THE MBI FUND

Management Buy Ins along with Management Buy Outs throughout the 1990’s provided the effective and preferred route of Venture Capital Investment into British business. Certainly over the last 3 years the amount of available opportunities for MBI/MBO deals have been outstripped by the available MBI/MBO candidates that have been searching for suitable deals and with many VC companies running a stable of suitable candidates and executives which they are prepared to back for such suitable deals, competition has been fierce when an investment opportunity has arisen. 

With this type of competitive culture, concentration has been on the big-ticket earners with smaller investment opportunities often being ignored given the longer term growth and return potential. Organisations such as Beer & Co are well known in introducing Investment Angels to companies that require outside equity investment. We believe that the management buy in approach is equally right for lower level equity investment, and providing the clients have a centralised access to this opportunity for funding, MBI investment offers a highly attractive alternative.

Throughout 1999 HCI conducted a number of pilot schemes and market research to establish the appetite not only for lower level investment by MBI candidates into potential companies, but also to identify the willingness of the smaller business to accept an equity investor that would be a working partner in the business and bring perhaps additional expertise to that venture. 

The results we must tell you were extremely encouraging, following contact with a wide selection of businesses. Over 90% who required equity funding stated that they were more than happy to have a suitable candidate buying into their company. They also welcomed the opportunity of adding to the skill base within their organisation, particularly in an area which would benefit forward requirements.

The MBI candidates we approached confirmed that the opportunity to evaluate a larger number of smaller companies with growth potential was a highly attractive option and confirmed that they would be more than prepared to register with a company that marketed their expertise and ability to fund a lower level MBI investment.

The most interesting response to the above research was from the Institutions and Venture Capital Companies themselves. Given that a centralised register of MBI candidates would be put in place providing suitable funding for the lower level of equity funding, the Institutions themselves felt that they would be more willing to be part of a combination of financial packages that could be put together utilising the MBI candidates investment as the catalyst to proceed with the venture.

All sorts of possibilities have emerged from the pilot schemes with teams of MBI candidates prepared to pool resources to provide larger investment sums to attract additional funding. Backed by HCI’s experience in putting together such packages, we believe the Equity Gap can be more readily addressed.

As an example let us say a company required £1,000,000 to expand its operation via a series of acquisitions, however its current facilities with its bank were only £100,000 in the form of an overdraft. Given that at least 50% of the requirement i.e. £500,000 would be for streamlining the combined businesses, redundancies, new sales and marketing initiatives to promote the new venture, the bank was unwilling to extend further facilities without suitable security. However take forward the following proposal utilising the injection of MBI funding and the proposal becomes far more attractive:

An MBI candidate invests say £350,000 into an equity arrangement with the bank converting its overdraft facility into a 3-year Business Development Loan whilst raising this facility to say £150,000 This provides the £500,000 required for the restructure and development funding with the balance coming from factoring/invoice discounting/asset funding.

The main point to observe from the above example is that the MBI investment gives confidence to the existing and additional institutional funders of the business to involve themselves in a sensible package where everyone benefits.

In a recent article in Business Money last year, I observed a comment from a well known factoring company in a somewhat comical fashion that Joe Soap (the client) is in the habit of stating that “ I am not having some old git telling me what to do and holding 60% of my business”. 
Whilst I do believe this was said with tongue in cheek the fact never the less is that businesses will have to give up some equity when inviting in a management buy in candidate, and that person will have a say in the running of the business - after all - he is risking his own money in doing so. 

It is our opinion that directors and owners of businesses are quite prepared to formulate deals which involve a proportion of the company’s equity being forgone in return for that vital injection of equity capital. In addition, bringing on board additional expertise in the form of a seasoned executive is often a very positive move welcomed by all but the more cynical of businessmen.

Funding for businesses is very rarely about utilising any single form of finance and very often the packaging together of 3 or 4 separate sources into one combined package gives the company and its management team the flexibility that is required. If nothing else, the 1980’s taught a lot of businesses and institutions the danger of holding all the eggs in one single financial basket.

Hoskyn Child International Limited is in the final stages of putting in place the MBI Equity Fund/Register. This is being run as a separate subsidiary to HCI, however the company will utilise the expertise and skills of the HCI consultants to put together complete packages for interested clients.

The new company has already on board a wide selection of MBI candidates with personal funds for investment ranging from £250,000 to £2,000,000 In addition, nearly all of the candidates on the Register have in place additional funds available for investment via Venture Capital companies that they have already approached, and depending on the proposition these could be also available.

The register is to be limited to a total of 100 MBI Candidates and this will produce a total available fund of between approximately £25,000,000 and £100,000,000 The company will not, however, make any investment decisions on behalf of either the clients or the MBI candidates. The purpose of such a register/fund is to provide the opportunity for introductions between MBI candidates and companies seeking funding.

In addition to the above, negotiations are taking place with a number of financial institutions from banking, venture capital through to factoring, invoice discount and asset financing sectors to establish support for the financial packages we have described. This is to hopefully ensure that the type of uniform and structured deals that the clients are looking for can be presented quickly and efficiently and a total package for the benefit of all parties is arrived at.

We are hopeful that support for this initiative will be forthcoming from all areas of the financial community and that all parties will welcome the opportunity to participate in addressing the long standing problem of the Equity Gap.

Hoskyn Child International is an organisation that specialises in the following operational areas: 
• Corporate Rescue and Recovery
• Company Turnarounds
• Financial Restructuring
• Fundraising and Financial Packages
• Planning & Strategy