Duke Royalty plans to lend £60m to small businesses through its innovative royalty finance product by next April.

Currently Duke Royalty has £100m tied up in 11 small businesses, none of which are in particularly sexy sectors. Its sweet spot for investing is between £5-10m in any one business. Indeed, it takes pride in lending its mortgage-like product to solid firms in everyday sectors.

“Boring is the new exciting,” chuckled chief executive Neil Johnson.

Duke Royalty has just announced its 2020-21 financial results, which saw a 7 per cent year-on-year increase in cash revenue to £11m and pre-tax profits of £16.1m – and that was at the height of the pandemic.

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Since April it has lent another £24.5m to royalty partners including three new what it calls “partners”.

In June it lent €10m to Fairmed Healthcare, the European subsidiary of India’s Strides, which manufactures generic medicine such as ibuprofen and paracetamol once drugs have lost their patent.

In July it arranged an initial £7.7m facility for InTech, an outsourced IT solutions provider, to help it buy more small IT maintenance companies. Duke Royalty finance director Hugo Evans points out that once a business has outsourced its IT maintenance it is loath to change provider with a 90 per cent renewal rate.

Then in August it lent an initial C$8.3m (£4.8m) to Creo-Tech, a Canadian engineering company which manufactures and services pipelines for the North American gas, oil, hydro and forestry sectors.

Duke Royalty has also seen five exits from its portfolio, which at one point had £140m tied up in 16 different businesses.

What is royalty finance?

The fund uses a concept called “royalty finance” that invests in SMEs against future cash flow. Basically, royalty finance acts like a business mortgage. One attraction for a small business owner’s point of view is that it is a way of raising long-term finance without having to dilute equity.

Unlike debt, which is keen to be repaid in full within a relatively short time period, Duke says that it doesn’t want its capital back – ideally, it wants to grow its annual return over time, as how much Duke earns depends on how the company performs. Duke shares in both the upside and downside over the life of an investment.

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The obstacle for Duke is finding SMEs that fit its investment criteria: ideally, it is looking for SMEs which have been running for at least eight years and have turnover of anything between £2m and £10m.

However, the financier says it has been talking to double the number of potential investees than it did last year, admittedly at the height of the pandemic.

Battening hatches

In April 2020, AIM-listed Duke slammed the brakes on any new loans for a three-month period, and it also suspended its dividend to shareholders.

Johnson said: “The pandemic felt much more like 9/11 than the financial crisis of 2008. It was all leftfield and very sudden. However, at the beginning of any crisis like that you have to preserve cash flow, you have to assess the downside and have a three-month battle plan for survival because it affected of our SME portfolio negatively.”

Although it battened down the hatches when it came to adding what it calls “partners”, Duke did not fire anybody or put anyone on furlough and did not take out any Government loans, such as the Coronavirus Business Interruption Loan (CBIL). Indeed, it sees SMEs now realising they have to repay emergency Covid-19 Government support and needing to put their finances onto a more long-term footing as an opportunity.

Johnson said: “What has become clear to us is that the market opportunity is larger now that it was before the pandemic. We can refinance that CBIL debt with a long-term affordable solution.”

Given that this kind of royalty finance is a $50bn market in the US and Canada, Duke Royalty appears to have the UK market all to itself. This is partly because establishing an operation like Duke is both difficult to do from scratch and also if you are an incumbent such as a bank, and also because explaining the royalty finance product to SME owners is “very difficult” Johnson admits.

“I pity the next guy who wants to start a royalty company in the UK from scratch,” said Johnson.

Further reading

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