Growing business and the mid-market: views from the BVCA Summit

Economic turbulence, increasing competition and tech disruption are all causing much furrowing of brows for mid-market fund managers, but there are plenty of great opportunities out there for the smart investor.

The macro-economic environment is likely to have a major impact on mid-market investing over the coming years. That was the view of delegates at the BVCA Summit in October and, as one panellist noted, it would be very reckless to assume there won’t be a stalling of growth, if not outright recession in the years ahead. Such sentiment is affecting deal decision-making.

Companies with a strong financial profile, with easy to understand models, are commanding very high valuations. For other investors, a secular (non-cyclical) growth story, complemented with inorganic growth opportunities, are most attractive in this environment.

Technology has lowered the barriers to entry for small businesses to enter new international verticals, so growth-focused investors are making sure portfolio companies are tech-ready to exploit that opportunity. Meanwhile, investors are being conservative around the capital structure. “Take as little debt as you can get away with, within the confines of the deal,” said one panellist. A far cry from the more tabloid perception of the industry.

On top of this, mid-market fund managers are facing ever more competition: “I can’t remember a year that didn’t feel harder and more competitive than the year before,” said one. But, she added, by working with entrepreneurs, you are working with the people who are best placed to judge how things are changing, how they can be disrupted and how to respond or adapt to that. Therefore there is “always an opportunity at the front end of the economy”, where clever people work to disrupt the status quo and improve life for everyone.

The only question is how to find them. Or rather ‘when’ to find them. To which there is only one answer: early. Investors have always tracked promising companies, but these days they are engaging many years before a potential acquisition, building relationships, trust, confidence and their knowledge of the asset.

Meanwhile growth and mid-market firms are increasingly building out their operational capabilities, particularly among the growing band of sector-focused mid-market firms, which is balanced out with the wishes and expectations of management teams.

Smart use of technology may also help, but investors were cautious about expecting too much too soon. There is a sense that big data holds much promise, but knowing the right questions to ask in the first place is a challenge that requires judgement rather than brute force computing power.

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