HSBC is a founding shareholder of both the UK and Canadian business growth funds and witness to the benefits that long-term, patient capital has delivered to the close to 300 fledgling companies that have so far received equity injections from these consortium vehicles.
The Australian Business Growth Fund will fill a gap in the market because debt finance, typically offered by banks to support investment, is not always the most an appropriate funding option for all business models and company structures. This is as true in Australia as it was in the UK and Canada.
This issue can arise, for example, if SMEs lack sufficient collateral to use as loan security for the working capital or core debt funding that would fuel their continued growth.
For companies which cannot access bank debt or public markets, venture capital is another source of finance, but in 2016, Australia ranked 14th out of 16 countries when venture capital funding was measured as a share of GDP by the OECD, ahead of only Slovakia and Russia, and well below the average . The Reserve Bank of Australia has also noted that an offer of finance from venture capital and private equity firms may not be on terms which are attractive to entrepreneurs.
The Australian Business Growth Fund will address this challenge by broadening the type of finance available to established SMEs to include patient capital that can be used to take full advantage of opportunities both in Australia and overseas.
The lessons from abroad are encouraging.
The UK’s Business Growth Fund was established in 2011 by five major UK banks, with a capacity of £2.5 billion for minority stakes of up to 40 per cent, typically £2-10 million, in growing companies in the UK and Ireland . It has already invested £2 billion in 285 companies, more than three-quarters of which are based outside London and make economic contributions to their local communities.
Any initial scepticism about the relative merits of the fund was doused by its success in delivering equity finance across the UK on good terms and in an efficient manner, increasing sales and jobs in the process.
The UK fund is now the world’s most active investor by volume and has a diverse portfolio that allows it to manage its overall risks by offsetting losses in some companies with gains elsewhere, taking a long-term approach to investing.
The fund’s portfolio also reflects the diversity of the UK economy, with investments in nearly every sector of the economy – including retail, energy, hospitality, engineering and healthcare.
This successful multi-bank model was the impetus behind the establishment of the Canadian Business Growth Fund, which has now made its first investments . That fund had an initial capital commitment of CAD545 million, with capacity to increase to CAD1 billion depending on its success. It makes equity and subordinated debt investments of CAD3-20 million by taking stakes of between 10 per cent and 40 per cent in carefully selected companies.
Since it became operational in June last year, the Canadian fund has invested CAD63 million into local companies, including its first follow-on investment.
Banks have a strong motivation to support initiatives such as these because they provide the economies in which they operate with the necessary capacity to support a wide range of commercial activities. In simple terms, this maximises the opportunity for economic growth which, in turn, gives banks a better environment in which to pursue their own businesses.
More than out eight of 10 mid-sized Australian companies expect their business to grow in the next five years, according to a recent HSBC survey . The Australian Business Growth Fund will provide an additional avenue to support their ambitions by facilitating the expansion of productive enterprises, which would in turn create jobs and buoy Australia’s overall economic well-being.
This article by Noel McNamara, Interim CEO, HSBC Australia, first appeared in The Australian on Thursday, 28 November 2019.