Last year was the most successful 12-month period to date for the growth capital investor. BGF completed 59 deals compared with 31 in 2015 and was the UK’s top institutional investor in Q3 and Q4.
Its latest investment announcement – funding of £10m to support the growth plans of Frontrow Energy Technology Group – is the icing on the cake.
Investor Mike Sibson, who will join the board of Frontrow, puts BGF’s success down to taking the time to get to know the teams behind the business plans.
“Despite these strong headwinds in the energy industry, and across the whole of UK, 2016 was a record year for BGF, and we will continue partnering, supporting and investing as part of our strategy to provide truly long-term capital to companies scaling up,” he says.
“It’s quite a long-term game and we have spent a lot of time building relationships across the market.
“Often investments will be made three years after we have met a team. It’s a long lead time and I think, having spent all that time building up those relationships, you start to get the reward for it and that’s where we have benefited.”
That was certainly the case with Frontrow, which was set up by chairman Graeme Coutts, the former chief executive at Expro Group and current chairman of BGF portfolio companies SPEX Group and STATS Group.
Frontrow – which has established and grown a group of energy service companies and created a hub for the development of exciting new technologies and the provision of operational guidance and expertise for entrepreneurial teams – is led by chief executive Stuart Ferguson, former chief technology officer at Weatherford, who has a track record in building valuable oilfield technology businesses.
He heads a senior team which includes non-executive director Colin Smith, who sold his Petrowell business to Weatherford in 2012, and executive director Frank Summers, who ran the successful Simmons Fund 1, leading investments in Red Spider Technology, Xodus and EFC.
“The team behind the business plan is the number one priority for any investor, but particularly at the smaller end of the market the track record of the team is the biggest determinant of the success of the business,” says Sibson.
“We have been working with Graeme for a long time. He has got to know BGF and we have got to know him.
“He and his colleagues started with some very successful angel investments in small service companies, including BGF portfolio company SPEX, and then made some larger investments in the Frontrow companies.
“Their aspiration was to build a broader energy technology group which combined those companies into a group, and meant they could continue to acquire and invest in exciting tech companies.”
Companies already in the group include Well-Sense, a downhole technology business with an innovative and low-cost way of collecting data from oil wells; Well-Centric, a provider of wellhead servicing operations offshore; and Interventek, a subsea technology business.
All three are based in an incubator facility in Dyce, Aberdeenshire, and have access to shared resources.
Thanks to BGF’s investment and the investment of £3m from the group’s founders, Frontrow can continue to add to its resources and infrastructure with a view to developing other promising young technology companies in the North-east’s energy industry.
“Our vision is to build a group of world-leading technology businesses based here in the North-east of Scotland, which has long been a centre for the development of downhole and subsea technologies,” says Coutts.
“We have had a long-standing relationship with Mike Sibson and his colleagues, so BGF was top of our list when we wanted to expand Frontrow’s capability. We’re not just tapping into the capital that BGF can supply but also into its expertise and network too.”
The partnership works both ways. “For BGF, it provides us with an extra dimension to our business in that it gives us access to the earlier-stage companies which we otherwise wouldn’t invest in because we don’t have that expertise,” says Sibson.
“It brings us a partnership with a team which has great expertise in the sector – it helps us in a number of ways as well as being an exciting investment that will make us money.
“From Frontrow’s point of view, it’s great to have a supportive investor who understands the sector.
“As they make new acquisitions or start new companies, they will draw down further amounts from the investment to do that.
“We expect to put more into the business as we go on and we expect them to build a group of exciting tech companies.
“This deal allows us not only to invest in the growth and development of Frontrow, but it also extends our reach into younger, earlier-stage companies in oil and gas and the broader energy industry.
“We are backing a team with a deep understanding of energy technology, a strong industry network and the operational experience to bring new products to market.”
This is certainly not BGF’s first foray into the oil and gas industry, where Sibson says the economic situation is showing signs of recovery.
Already in the portfolio managed from BGF’s Aberdeen office, eight of its 11 companies are in the oil and gas sector, while BGF has invested in a further three oil and gas companies based elsewhere in the UK.
“The industry is cyclical,” he explains. “We had a very long ‘up’ cycle and now we have had a very long downturn.
“I think, overall, the world’s demand for oil and gas continues to increase and we have seen signs in our portfolio and in the market of it starting to improve.
“We are actually pretty optimistic that, as the market starts to improve, there will be some exciting opportunities for us to invest.”
Sibson’s optimism rings true of BGF’s outlook on the year ahead.
“The market is showing signs of improvement from last year and we have a small number of investments in the pipeline.
“We would like to be making five or six investments a year in Scotland. Our average investment is about £5m so that’s £30m a year.”
Is BGF looking to branch out into previously uncharted territory? No, is the simple answer. BGF has already broadened its horizons with its venture capital arm, BGF Ventures, and its distinctive new funding option to accelerate growth for the brightest AIM-listed companies.
“We think it’s very important that we stick to what we are good at and we deliver on the reason that BGF was set up which was to provide long-term minority equity capital to SMEs. We are very focused on delivering that objective.
“There are 25,000 companies in our target market across the UK and we have invested in 165 so we still have a pretty big market to go after.”
BGF has invested in 165 companies over five years in the UK, including 18 in Scotland.
It has invested in sectors including waste, hospitality and leisure, manufacturing, technology and retail.
These businesses have a combined revenue of £4 billion and employ more than 30,000 people, making them equivalent to the UK’s eighth-largest private business employer.
In 2016, BGF provided £387 million in funding to UK smaller and mid-sized companies, up from £257m the previous year.
A total of 59 deals were completed in 2016, compared with 31 in 2015.
BGF was ranked the seventh most active private investor in the world in 2016 based on number of deals completed.
In 2016, BGF invested in 21 AIM-listed companies, providing funding of £53m.
Last year saw some of BGF’s first exits including in Livingston-based window and door manufacturer Stevenswood. Since BGF invested in the business, it grew revenues from £10m to £18m in an 18-month period.