EXCLUSIVE: BGF, Britain’s biggest investor in scaleups, has raised £80m in additional investment through Coutts, the private banking arm of NatWest.

Coutts’ clients have put the money into the BGF UK Enterprise Fund, which invests alongside BGF in promising fast-growth companies.

UK Enterprise Fund has backed 66 companies to date since its inception in 2021 with Coutts co-investment.

What is encouraging, said BGF, is that Coutts clients who have a private equity background have supported UK Enterprise Fund alongside successful entrepreneurs.

“Executives in private equity with previous experience of the industry have chosen to invest, which is a great endorsement of what we’re doing,” BGF chief executive Andy Gregory told Growth Business.

To date, BGF, which was set up in 2011 by high-street banks – Barclays, HSBC, Lloyds, NatWest and Standard Chartered – to invest in Britain’s 30,000 or so scaleups, has invested over £3bn in more than 500 companies over 12 years.

And that pace of investment is increasing, with over £1bn invested in 100 companies within the last two years alone.

It currently has 360 companies in its portfolio.

BGF has exited about 150 businesses so far, of which 80 have again been within the past two years.

It currently has a 23 per cent internal rate of return, a figure which “shareholders are very happy with,” Gregory says self-deprecatingly.

The new BGF boss sees the level of exits that BGF has seen over the last few years as more vindication of its business model.

What makes BGF different from other investors is the size of the companies it invests in. Typically, a BGF portfolio company will have an annual revenue of around £20m and its average cheque size was £7m last year. So, it’s not aimed at start-ups, and it’s not aimed at larger companies suitable for private equity investment – if it was, his life would be easier, says Gregory.

“There’s lots of private equity at the level above that,” says Gregory. “BGF is filling the gap.

“The purpose is providing flexible, patient long-term growth capital as a minority investor. Our whole culture is of a supportive junior partner to entrepreneurs.”

Key to BGF’s strategy is that it is always a minority investor, typically taking an equity stake of between 20 per cent and 40 per cent in exchange for investment.

Gregory says: “We can articulate to entrepreneurs that there’s a different path to go down, a minority funding route with us being a successful aspirational funding partner.”

BGF invests about £500m a year from a balance sheet of around £3bn.

Says Gregory: “The other critical aspect is that we can invest from our own balance sheet. There’s no borrowing and there are no commercial timelines. Our message is that we can invest from day one, but we are very happy to stay in for ten years, providing critical lifetime funding and we are not going to be pushing for or fording an early exit.”

Last year, £675m of proceeds were recycled into the fund, which deployed £440m that same year.

Although BGF is a general investor when it comes to later stage companies, it does concentrate on investing in life sciences and clean tech when it comes to early-stage investments. Deal sizes here are between £500,000 and £5m. This is because, says Gregory, these sectors are underserved in the early stages when it comes to capital. Yes, the risks (and rewards) are higher but there are “long-term positive tailwinds” when it comes to those sectors, he says.

What BGF is not interested in doing is gradually increasing the size of its cheques, which is what everybody else does, says Gregory. “There are plenty of private equity houses funding management buyouts, and there is plenty of seed funding, but there’ still in midpoint gap in growth capital between that.”

Generational opportunity

Gregory became chief executive of BGF in September 2022, having risen through the ranks since inception. He joined BGF at birth having previously worked in private equity, mainly for RBS and NatWest. He says that he wanted to join BGF because he saw it as a once-in-a-generation opportunity to be involved in something different.

“The attraction was BGF being set up with a genuine differentiated purpose,” Gregory says, “filling a gap in the market plus the potential of being involved in something from the very beginning and helping to shape that.”

And, because Gregory is an insider, he sees his leadership strategy as being more evolution than revolution. The model is working, he maintains, which has been demonstrated by both external support such as the Coutts fund and by the volume of exits and returns.

Gregory says: “We need to continue to deliver appropriate commercial returns to our shareholders. We want to be here in 10-20 years’ time as a successful, commercially sustainable business. We need to continue to build and improve the different ways we support and help businesses.”

Last May, The Sunday Times published a critical profile of BGF, damning it for being profligate with shareholders’ cash and being too loose with its investments.

One former employee dubbed it a “relentless dealmaking machine” with executives under pressure to close deals. This former employee claimed that annual bonuses were mostly tied to how much money an executive invested.

Gregory rejects this notion but accepts that at this lower ticket level, investment volumes are high. “It would be much easier for me if it was just about getting money out of the door. Then we could do bigger, more standardised deals. We need both quality and volume – and we can’t compromise on quality.”

Another criticism was that BGF invests some of its cash in publicly quoted companies. Gregory points out that the quoted companies it invests in are on the smaller AIM market specifically for SMEs, and that BGF’s investment strategy has always been to support a business at different stages of its journey.

He also rejects the idea that BGF has become too big, distorting the market.

“I take soundings, but we never hear that. We are not coming in with sharp elbows displacing incumbents. Typically, we are providing a growth capital minority investment as opposed to a change-of-control, majority investment.”

What Gregory does admit, however, is that BGF has been hit by the post-pandemic, post-Brexit talent shortage when it comes to finding investment experts.

Says Gregory: “I want us to be the go-to aspirational funder for entrepreneurs. The junior partner. So that we can achieve this, because it’s not easy, we need to bring in quality investment professionals, the people who decide what we invest in.”

For Gregory, it’s not just about the money but also the value BGF can add in terms of support, which he says is a really important part of the offer.

Sums up Gregory: ““The returns we have realised over the last couple of years have really proved our business model. This gives us and our shareholders a high level of confidence that we are doing the right thing and we need to continue to do that. The model is right, it’s a question of continuing to do it better.”

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