Duke Royalty, the AIM-listed finance fund, is sitting on £45m of cash it wants to invest in established small businesses.

Duke, which to date has closed a dozen deals, raised £17.5m in additional equity in October, having fully deployed most of the £95m it originally raised.

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.

Although Duke Royalty aims to back around six businesses each year, its most recent deals have been extending existing facilities to two customers: investing £1.4m in communications systems provider Welltel Ireland and putting another £250,000 into Step Investments, owner of cinema advertising firm Pearl & Dean.

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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.

Neil Johnson, CEO of Duke Royalty, said: “Unfortunately, we’re not in control of all aspects of a deployment. Our owner/operators see their businesses as their children. And when you’re dealing with founders giving up equity – we’re trying to help finance a management buyout right now – it becomes even more complicated.

“Each deal is different. That’s why we try and have lots of deals going on so at any one time.

“We’ve come from a standing start doing 12 different deals in a dozen different ways. In the UK there’s a £2.5bn funding gap as banks have withdrawn lending to small businesses. That’s billions being taken out of the system, so there’s a lot to play for.”

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Announcing its results for the six months to September 30 2019, Duke Royalty announced that it has more than doubled revenue to £5.9m compared with £2.7m year on year. Net profit before tax rose from £1.1m in H1 2018 to £3.7m .

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.

Johnson said: “We give company owners the ability to maintain control of their company by not diluting equity and, as opposed to debt, there’s no repayment risk to face.”

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