The Big Interview: The Business Growth Fund's Paddy Graham

Paddy Graham takes pride in his many successes in 16 years of investing, but is philosophical about the opportunities that inevitably slip through the net along the way.

Paddy Graham is looking to grow the number of businesses BGF has teamed up with in Scotland. PIcture: Jon Savage

Since 2012 he has been part of the ranks at Business Growth Fund (BGF), billed as the UK and Ireland’s most active investor in small and medium-sized firms, and in 2016 he took the reins at the organisation’s investment team in Scotland’s Central Belt and Northern Ireland.

Graham acknowledges that getting it right every time is not possible. “But that’s just part of the game and the business that we’re in,” he says. “You win some and lose some and you’ve just got to move on.”

BGF was set up the year before Graham joined, backed by £2.5 billion from Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered as part of the government’s efforts to boost funding for small businesses after the financial crisis. It set out aiming to offer growing companies and ambitious entrepreneurs patient capital (also known as long-term capital) and strategic support.

The organisation has to date ploughed about £1.6bn into about 240 companies – it was an early investor in children’s ride-on suitcase firm Trunki that failed to secure funds from Dragons’ Den – and about three-quarters of its investment has been outside London and the southeast of the UK.

That includes £200 million in Scotland and Northern Ireland, and it has injected funds into more than 20 firms north of the border.

Last year BGF altogether made a pre-tax profit of £113m after some of its portfolio companies were sold. Scottish exits have included window and door manufacturer Stevenswood, with Edinburgh-based Graham describing his role in helping its management achieve their ultimate goal as “hugely rewarding”.

Another high note he mentions is the success of photonics and quantum technology company M Squared, whose products are used in advanced manufacturing, oil and gas research, space technology and the medical sector. BGF first injected cash into the Glasgow-based firm in 2012, and Graham says it has gained the status of a “world leader” in its field, garlanded with the Queen’s Award for Enterprise in Innovation in 2016 and International Trade in 2017. (BGF itself won a Queen’s Award for Enterprise in the Innovation category this year, the first investment company to achieve such an accolade).

He credits himself with only a small role in M Squared’s success, with BGF providing capital and access to its wider network, while the business did all the heavy lifting. “But it’s hugely satisfying just to see what they’ve done in their own industry. We’ve been in that business now for seven years and we will continue to support it in the years ahead to whatever its ultimate plans are.”

That ties in with his emphasis on the benefits of patient capital, an approach he sees as enabling firms to leverage their potential and avoid being driven to progress at a pace that outstrips their capabilities.

Businesses will inevitably face hurdles along the way, he acknowledges. “Things are going to take longer than you expect… but our mantra is we just roll our sleeves up and work with the businesses, get through any bumps in the road and ultimately work towards getting the right end result.

“And that might be in three years’ time, that might be in seven years’ time, it might be in 15 years’ time – but we’re prepared to stand alongside the businesses to get to that point.”

BGF sees plenty of good businesses with credible teams and steady growth, which are driving value, creating jobs and boosting the economy.

“That’s forming the majority of our portfolio – and if it takes a bit longer to get to whatever the end result is, then that’s absolutely fine with us.”

The investment firm has 14 offices across the UK – including Edinburgh, Aberdeen and Belfast – and looks to help early-stage, growth-stage and quoted firms across every region and sector of the economy.

It was established by chief executive Stephen Welton, whose previous achievements include being among the founding partners of the global private equity firm CCMP, and MD of Barclays Private Equity and Henderson Ventures, which he co-founded.

BGF is deemed the most active growth investor in the world in terms of the number of investments per year, averaging about one investment per week.

Graham says with a laugh that such a pace is “quite terrifying”, but he sees it as “just a testament in terms of how we’ve hopefully managed to spread our name in the market and also scale our own business to be able to deliver that rate of investment”.

He adds that its portfolio is sector-agnostic, and that is borne out by the appearance of names in Scotland of everything from Edinburgh-based fancy dress specialist Morph Costumes to bar and restaurant chain Bar Soba and Keenan Recycling. Also on the list is Glasgow-headquartered high-precision component manufacturer Walker Precision Engineering, which in January secured £4m to grow in the UK and mainland Europe.

Graham says BGF is keen to offer its support when it spies the right opportunity where capital can help unlock growth, “and with the right management team around the table”. It makes long-term equity capital investments in return for a minority stake, with initial sums typically between £1m and £10m. “Significant” follow-on funding is a possibility, while the organisation can provide access to an “unparalleled” global network of business experts.

Graham originally studied law, and then decided to pursue his interest in maths and economics and go down the accountancy route, signing up with Arthur Andersen, but after it became embroiled in the Enron scandal he joined Deloitte.

This was followed by a move to Sigma Capital Group, a finance, residential property and urban regeneration specialist.

He arrived there with some corporate finance activity under his belt, “but no real front-facing investment experience – so I cut my teeth there”. And he worked on various earlier-stage deals, with his focus on providing development capital into the general tech and clean tech sectors across the UK and Europe.

However, after six years an opportunity at BGF presented itself, and he found the nascent investment firm an “intriguing” proposition, combining the excitement and fast pace of the start-up sector but with the copper-bottomed backing of billions in capital resources. “It’s a fairly rapid growth story – but been a very enjoyable one to date.”

Activity has continued apace, with the announcement last month that it was helping fuel the expansion by Northern Irish coffee chain Bob & Berts into Scotland.

BGF has five investors covering Scotland, and Graham is looking to grow the number of businesses it has teamed up with north of the border to 30+ in the near term. But the sky is the limit – with intelligence constantly being gathered on entrepreneurs and businesses to watch, and vastly outweighing the number of deals made. Indeed, of the 80 to 90 face-to-face meetings a year, only about three or four agreements are inked over the same period.

“In my mind there’s no great science to picking the deals,” he says. “What fundamentally I and my team look for is who are we backing… you’ve got to believe in the people that you’re supporting and get on with them and that works both ways,” he adds, citing the need for a “meeting of minds” between BGF and the relevant firm over the latter’s medium to longer-term goals.

“If you don’t get on with each other on day one it’s going to be an unenjoyable journey – and life’s too short, frankly.”