CAPEX TO BUILD GROWTHMay 2013 | Feature
Aberdeen-based STATS Group and South Wales’s SHS Infrastructure Services (SHS) may be hundreds of miles apart but the two businesses have much in common. Both specialise in largescale project management and engineering services for demanding clients; both have exciting growth plans that are dependent on capital expenditure; and both have turned to Business Growth Fund for help.
Without external investment to fund that expenditure, both companies would probably still be struggling to fulfil their potential. With the money, however, the two businesses are building reputations as leaders in their fields: STATS provides maintenance, repair and modification of oil and gas installations and pipelines, onshore and offshore, while SHS erects and dismantles large-scale scaffolding constructions on technically demanding projects. “When I arrived in 2011, SHS was operating with a significant overdraft and was having to turn down opportunities to bid for new work,” recalls Gavin Payne, the company’s finance director. “We did have a finance line with the bank that was facilitating some growth, but cash was massively constrained and we were never going to be able to move to the next level – we turned away £6m of business in the first two months I was here simply because we didn’t have the capital to commit.”
SHS’s difficulties started with the pressing need for capital spending, Payne explains, because the projects where the company specialises, working at refineries in the petrochemicals industry, require so much equipment.
“We needed to spend sizeable sums on the basics of our business – on tubing, boards and other scaffolding kit,” says Payne. “And we wanted to think longer-term – for example, we’d always bought wooden boards, even though steel boards last much longer, because our cash was so short we needed the cheapest option even when it turned out to be a false economy.”
Another issue was cashflow, adds Payne. “Payment terms in this sector are generally 60 or 120 days, which makes life very difficult for under-capitalised businesses.”
It is a story that Pete Duguid, the chief executive and founder of STATS Group, recognises very well. Duguid first launched STATS in 1998 and spent most of the next ten years battling with the company’s constrained finances. “I vividly remember my bank manager telling me I couldn’t build a business on enthusiasm alone and in truth, while there was always growth, we were constantly fighting working capital,” he says. “That was fine in 2007 when the banks were offering very easy access to credit but then the financial crisis came along and the oil market collapsed.”
In the years following the crisis, STATS faced a challenge simply to survive – not because of any flaw in its business model or products and services, but because it did not have the capital buffer needed to ride out a difficult trading period comfortably.
Fortunately, the business made it through, but Duguid realised he needed help to take STATS on to the next level. He could see clearly how the company could expand its range of products and services, and had plans for international expansion. But STATS still lacked the resources for the capital expenditure required to turn that vision into a reality.
“By the end of 2010 we’d stabilised but banking support had disappeared,” Duguid says. “I had to make a call – we knew we had to do something different and that’s when I began looking foroutside investment.”
The search ended in March 2012 when BGF invested £7.8m in STATS, in what was then only the fund’s fourth investment. Six months and 11 other investments later, BGF and SHS agreed a £5.4m injection of growth capital in the scaffolding business.
“What’s clear in both these cases is that the companies had no chance of any significant growth without taking on additional capital,” says Paul Oldham, a BGF regional director based in the Bristol office. “They could have opted to go for much slower growth, but they were ambitious, which is one of the things we look for in a company when we’re considering whether to invest.”
Oldham believes growth capital of this type – as opposed to debt – is ideal for companies with large capital expenditure requirements. You’re not going to be able to arrange debt for a period of longer than five years, which isn’t a great basis for long-term capital investment,” he argues. “Even as you’re investing, you’re already worrying about when you’ll have to roll over the borrowing.”
In contrast, Oldham says, with a slug of capital to fall back on, businesses can concentrate on worrying about growth rather than financing. “What our money has done in both these cases is take away the constraints from these companies and level the playing field with their larger competitors,” he argues. “That’s what BGF does – we invest in smaller companies whose skills are just as good, or better, as those of larger companies, and whose products and services are of equally high quality, or higher, so that they’re no longer at a disadvantage just because of their balance sheet.”
SHS’s Gavin Payne shares that analysis of the value of growth capital, but says he had particular reasons for choosing BGF.
“We spoke to a number of potential sources of funding, and while BGF’s terms were competitive, more important in the end was our impression that there was a greater willingness to work with us,” he says. “It didn’t feel like a traditional private equity involvement – they’ve only taken a minority stake and while we welcome their support and advice, it’s still us running the business.”
At STATS, Pete Duguid had similar anxieties. “My concerns were all about whether I was working for a new master and about how the decision making process would work,” he says. The fact the fund was happy with a minority stake in the company helped allay those fears. BGF also introduced Duguid to oil industry veteran Graeme Coutts, who subsequently became chairman of STATS and now plays a crucial role in helping the company realise its plans for international expansion.
In the end, says Paul Oldham, this is the type of edge that BGF needs to communicate to companies looking for investment.
“If all we were offering was money I think we would have done a lot fewer deals than we have done – our network of contacts is often an important part of businesses’ decision to go with us.”