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How A £2.5bn British Startup Fund Became The Most Prolific Growth Investor In The World

August 8, 2018
Borderless Leadership

– With cash from Britain’s biggest banks, BGF has invested £1.5 billion in 220 startups in just eight years,

– According to PitchBook, at its current rate of investment BGF is the world’s most prolific growth investor by volume of deals,

– CEO Stephen Welton is also said to be working on the launch of a £7.5 billion British mega-fund, but he tells Forbes that institutional investors and pension funds are holding up the launch.

Stephen Welton is a very busy man.

So far in 2018 his company, BGF, has invested on average in a business every single week, plowing over half of a £2.5 billion ($3.2 billion) war chest into 220 U.K. companies in the last eight years.

Millions have been funneled into groups like food delivery giant Gousto, children’s luggage maker Trunki and ad tech group Unruly—later acquired by Rupert Murdoch’s News Corp for £115 million ($150 million) in 2015.

In the last few days alone BGF, formerly the Business Growth Fund, has invested £6.3 million ($8.1 million) in construction group Molson and a further £10 million ($12.9 million) in U.K. holiday park operator Coppergreen Developments.

By some measures, Welton’s current rate of spending makes BGF the world’s most prolific growth investor by volume of deals.

His next act could be even bigger. Reports suggest BGF is on the verge of partnering on the launch a vast £7.5 billion ($9.8 billion) patient capital fund to place even larger bets of up to £100 million ($129 million) on British businesses.

Not that any of this seems to faze Welton.

BGF’s billions

“We’re quite a busy kind of organization,” the 57-year-old laughs over breakfast in London’s trendy district of Soho.

It’s not the typical stomping ground for Welton, who cut his teeth in the world of private equity by founding JP Morgan’s $10 billion private equity arm CCMP.

But today Welton has eschewed P.E. for a life of startups and upstarts, deploying the billions that he raised in 2011 from five of Britain’s largest financial giants—Barclays, Lloyds, Standard Chartered, RBS and HSBC.

BGF isn’t a “tech fund,” its portfolio is a broad cross-representation of the British economy, with investments in sectors like oil and gas, retail, manufacturing and healthcare.

The principle is to give Britain’s high-growth companies a longer-term alternative to either venture capital or traditional bank lending, both of which are inappropriate or inaccessible for many.

And unlike venture capital or bank lending, BGF doesn’t have to pay dividends to its own investors. Instead, the returns it makes are reinvested by Welton’s team.

Plus the scale at which the fund operates is nearly unprecedented.

Welton is reported to be working with the British Business Bank on its £7.5bn patient capital fund.BGF

How to build the world’s most prolific investor

“We have reengineered everything in terms of the way that we do business in order to be able to operate at this scale,” says Welton.

Every year the team meets around 2,000 companies, makes around 200 proposals, and completes around 50 deals—and all the while Welton’s team are collecting an unprecedented amount of data on every company they come across.

“For example, we’ve got an upcoming investment in Cornwall,” he says. “We’ve known them and been talking to them for five years, which means we’ve got five years of data from meetings and calls, and have been monitoring what’s happening in their sector and to their competitors.”

BGF’s bespoke database system currently spans over 15,000 companies, and Welton says he sometimes considers turning the tech “into a company in its own right, because it is so valuable and drives our business.”

Another way the company works differently is by not “over-engineering” its investment process.

“If you’re only making one or two investments a year, you’re going to want a consultants report on the market, a management assessment, an environmental assessment. … Before you know it, many investors in private equity have become project managers.”

BGF, on the other hand, does the majority of its due diligence in-house, rather than relying on outside consultants, and uses a standardized legal agreement for every company.

“We don’t need to understand everything about a company, we don’t need a full-blown accountants report. … It’s easy to generate lots of paperwork, but the hardest thing to do, and I remember this from school, is to write a short essay.”

Next Welton could be preparing to take his learnings from BGF to one of Britain’s most ambitious startup funding projects ever.

Britain’s mega-fund

With Brexit casting serious doubt on Britain’s future funding landscape, especially as the European Investment Fund (EIF) appears to be winding down the €700 million ($800 million) per year it invested in the country’s early stage businesses, the looming question is who will fill the void?

“There’s undoubtedly going to be a different relationship,” says Welton. “[EIF] has been a big funder of the venture capital industry. … The British Business Bank will undoubtedly step into that gap, but can they step into it completely?”

In response, the government has already set aside £2.5 billion for the British Business Bank to establish a new patient capital fund, with a further £5 billion needed from the private sector.

BGF was first reported by The Sunday Times to be in talks to partner on the new fund, which is still working to raise its private sector funding.

Welton’s involvement isn’t unsurprising, he’s been vocal in his calls for a “British mega-fund” and initially advised the government on the establishment of the British Business Bank.

The holdup with the new fund, Welton says, without naming names, has been bringing institutional capital to the table.

“I think it’s more a fundamental thing. I don’t think it’s Brexit-related. If you start with the big investors, and by that I mean pension funds, there’s a long-term shift into bonds, so their equity holdings are reducing dramatically.”

Welton’s argument to such pension funds is that equities—including the unquoted equities that he’s spent the last eight years investing in—are the only asset class which stands a chance of closing their deficits.

The £5 billion question is whether Britain’s biggest institutional investors will believe him and put their cash into Britain’s mega-fund.

By: Oliver Smith

Source: Forbes

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