Entrepreneurs re-think investment priorities during lockdowns

Research by regional mid-market private equity firm YFM Equity Partners (YFM) has revealed a growing focus on culture and working practices, rather than simply valuation, after almost a year of interrupted working and repeated lockdowns.

The survey polled over 120 entrepreneurs, advisers and dealmakers across the UK in December, and showed that the primary consideration for boards looking for VC and growth funding was the investors’ approach to working (48%), closely followed by their cultural fit with investors (45%), whilst the financial terms, once the dominant consideration, came in as the third most important criteria, only selected by 38% of respondents.

Analysing the survey results, David Hall, investment partner at YFM and managing director, explained: “It is clear that entrepreneurs have different priorities after the experience of the pandemic, and the impact it has had on their organisations, their people and their own quality of life.

“Our survey suggests that management teams are now placing more value on their long-term organisational health and bringing on board a supportive partner. That doesn’t mean that VCs can get better value for money, but rather they have to demonstrate the right approach and ethical standards as a prerequisite before they get through the door of the best growth businesses,” he added.

The survey polled the founders and boards of high growth SMEs across the UK, as well as leading dealmakers in the £2m-£15m market, the specialism for YFM that has investments in dozens of portfolio businesses. Respondents were spread across sectors including software technology, medical devices, business services, food and drink, retail goods, e-commerce and manufacturing as well as professional services.

Commenting on the results of the survey at a regional level, Jamie Roberts, investment partner at YFM and head of new investments in the South, said: “The findings came as no surprise from our own experience of 2020, and the investments we have made since the first lockdown last March. We work closely on the boards of our 40 or so investments, and after the immediate work to insulate businesses from the effects of lockdown, there has been a huge focus on supporting management teams, helping their people to adapt to a new normal in work and home life, as well as advising them on financial decisions.

“We have continued to invest in the YFM team in the South since March as, despite all of the market disruption, we are seeing a continued demand for investment. We have already added two new investment directors and two new portfolio directors, and we are currently adding a further two new investment managers.

“We have made two new primary investments in the South over the last year – supporting the MBO of GHG, a chartered loss adjuster based in Eastleigh, and a growth capital investment into Arraco Global Markets, a commodity broker based in central London. Both have had to adapt to new ways of working with their teams and customers. We continue to be impressed with the number of businesses which have continued to grow despite all the recent uncertainty, we have a strong pipeline of new opportunities and expect to complete a couple of new investments across technology, media and facilities management in the coming months.”

Fifty-eight per cent of those surveyed believed that the worst of the impact of COVID-19 for UK business was still ahead, with 15% unsure and only 27% believing the toughest times were behind the country.

Despite the relative uncertainty, over 57% of the entrepreneurs and investors surveyed planned to increase investment in 2021, with just 8% planning to reduce it, and the remaining 35% unsure about 2021 investment levels. Interestingly, ESG or sustainable investing had also moved further up the agenda with 68% of respondents highlighting it as being an ‘important’ factor when sizing up a potential investor. A theme YFM will return to this year.

Hall concludes: “There is obviously optimism to invest despite the widely held view that we haven’t necessarily turned the corner with regards to the impact of COVID on business. But it does seem that the hardships and disruption to business have caused a real, long term re-evaluation of priorities by founders and investors, and that’s got to be a rare positive that has come from all the negatives of 2020.”