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Stephen Welton has returned home to his natural investment habitat, backing smaller companies. GrowthBusiness sits down with him to find out what he is trying to achieve at the Business Growth Fund.
You’re going to fire me, you’re going to steal my company and run it your way. You’ll undervalue the business and force me to sell it when I don’t want to. Those are some of the chief concerns that Stephen Welton has had to deal with during his first year at the helm of the Business Growth Fund (BGF).
The path that Welton and his team at the BGF have taken has led to many encounters with entrepreneurs and business owners who had never before considered an equity investment as a way to boost growth. Convincing them to embrace external finance has not always been easy.
The firm, which started life as an inter-bank task force headed up by HSBC, has now been running for over a year and has closed 13 deals worth £66 million. Set up with an initial kitty of £2.5 billion, it has been tasked with becoming what 3i initially set out to do before it got distracted by the buy-out game: provide financial support for growth companies.
Welton was first invited to discuss the creation of the BGF over Christmas in 2009 and admits that curiosity compelled him to get involved.
He quickly realised that while the concept would not have worked in years gone by when the UK was enjoying a debt-fuelled boom, the ‘stars were aligned’ to make the new venture a success.
Hitting the rewind button on Welton, his career before taking up the reins at the BGF saw him enter the investment world by chance after training as a barrister but then deciding he wanted a more commercial career. It was through spending time in Boston and Los Angeles with a bank that Welton was first attracted to small fast-growing businesses and opened his eyes to venture capital.
The enthusiasm of the people in the venture capital world was a big draw, he says.
‘By definition all entrepreneurs are very passionate about their business,’ Welton explains. ‘That is infectious because if you are interested in business and have a commercial instinct like me, meeting people like that is very engaging.’
Welton then took up a role with a small start-up private equity firm for asset management group Henderson Administration that gave him a taste of making equity investments for himself. His next move was to an organisation that was at the time called Barclays Development Capital and has now, after many changes of direction, become Equistone Partners Europe.
It was while at Barclays that Welton took the unusual step of withdrawing himself from the investment world and taking up a role at one of the firm’s portfolio companies, TV Travel Shop.
Fulfilling the entrepreneurial streak that Welton says runs through him, his stint as chairman and CEO of TV Travel Shop gave him a completely different set of experiences.
He explains, ‘I think it’s really good for humility as it’s a real danger to assume that people who are financially led and strategic possess those traits that determine success.
‘We would have very interesting board discussions with partners such as Kuoni and Telewest and then I would leave the room to find out there was a problem with the call centre and the phones weren’t working.
‘So I’d suddenly switch from looking at where we are going to be in ten years’ time to where we are going to be in ten minutes’ time and that sense of realism is very important when we are looking at business plans today.’
After successfully leading the sale of TV Travel Shop to USA Networks for $100 million (£64 million) in 2002, Welton moved back into the private equity game but this time in a bigger, more global role. He joined JP Morgan and spent ten years at the firm, leading the spin-out of CCMP Capital.
Home sweet home
Welton’s role as CEO of the Business Growth Fund has seen him come full circle and return to backing smaller businesses, but this time he’s linked up with high street banks such as Barclays, HSBC and Lloyds, a situation which he says has led to a lot of day-to-day support from the institutions.
Each shareholding bank has a representative at board level and has, Welton says, been very forthcoming about opening up networks to the BGF.
While the work of the BGF is not enough to repair the tarnished image of the UK banking industry, Welton says that it is one of a number of incremental steps which will hopefully change public opinion.
He adds, ‘The perception of banks is inexplicably linked to the state of the economy, so whilst it is flat it will be tough.
‘As it starts to grow and people feel more prosperous their attitudes to banks will improve.’
Taking a look at the BGF’s portfolio one year in makes for interesting reading. The investment firm has taken stakes in businesses located in a wide variety of sectors ranging from bars and pubs chain Wear Inns to toy manufacturer Wow! Stuff.
Unlike a typical venture capital investor, the BGF is not banking on making a tenfold return on one investment whilst making a loss on five others. For Welton it is more about getting returns which are reflective of the fact that they are taking a growth capital risk and are in it for the long haul.
The enviable backing the BGF enjoys means that, where appropriate, it can follow its money further into an investment and provide a second or third injection of capital when needed.
However, when travelling across the UK in search of deal opportunities, Welton has said that his team has been met by a lot of ‘paranoia’.
‘Entrepreneurs often have pretty unusual personalities and have to be totally convinced at their ability to succeed when rationally people will say that they won’t.
‘So there is a determination you have to admire in any entrepreneur but with that may come an undue reliance and belief in people.’
A lot need convincing that taking on an equity investor does not mean relinquishing control of the business and that the benefit not only comes from an injection of capital, but also the in-house expertise that the BGF can provide.
Building a team
The firm now has employees from 20 different investment firms and has also recruited from outside the space by taking on people such as director of IT John Eggleston, former CIO at credit reference business Callcredit.
Another important hire is business director Mark Bryant, with whom Welton has worked in the past. Bryant has been tasked with taking his industry knowledge through roles at manufacturing companies such as Pressurements and General Electric to work with portfolio management teams to make sure profitable growth is achieved.
Welton says that the team is growing strongly and, since he became employee number one at the firm’s incarnation, it now has 70 people across six regional offices. Like the businesses it is backing, the BGF is in itself a growing business and is encountering many similar issues.
Each new recruit has been about not only broadening the services it can offer to portfolio clients, but also creating a framework which will ultimately allow deals to be completed in a more expedited way.
With 13 deals completed in its maiden year, Welton is firm in his belief that the company can build scale and leverage its infrastructure up so that it can be completing 30 to 40 deals per year.
It appears to be a case of walk and then run for BGF. After all its first year of dealmaking hasn’t even seen it dent the capital reserves it is set to pull down in years to come. But Welton is back where he belongs, supporting some of the best of Britain’s entrepreneurs.