SMEs could represent a direct investment opportunity for yield-seeking investors, writes Greg Carter
Sometimes it’s good to be small. In an unsettled financial climate, where analysts aren’t exactly sure whether or not Germany is in a recession, and when the US and China are struggling to sort out their differences on trade – not to mention the political strength and stability on show closer to home – this could be the SME’s time to shine.
In recent years, as economies around the world enjoyed an extended period of growth, investors reaped the rewards of high performing large-cap stocks. But as macroeconomic pressures threaten to weigh on big corporate entities, it makes sense that smaller enterprises – and the ecosystem of service providers helping them thrive – could represent a direct investment opportunity for yield-seeking investors.
I firmly believe in the robustness and agility of SMEs, both in Britain and around the world. It’s no secret that SMEs are able to respond quickly to changing economic environments: long before Brexit-related issues like stockpiling started hitting the headlines, SME business owners were scaling their enterprises up and down, adjusting to fluctuating market pressures.
All the same, it’s no accident that this shift in focus to smaller businesses has coincided with a proliferation in the number of platforms connecting SMEs with capital. Since the 2008 financial crisis, the banks have not exactly excelled themselves in delivering finance to Britain’s 5.6 million small businesses. Neither have the various governmental initiatives designed to kickstart lending since the crash: the Bank Referral Scheme delivered a paltry £15 million in funding between 2016 and 2018, for example.
Meanwhile, Growth Street’s own research suggests that in the decade to 2018, bank overdraft lending reduced by as much as £18 billion. The conditions are ripe for change.
In my view, the big banks’ apathy towards SMEs has helped challengers gain wider recognition. Unsurprisingly, in the early stages of the fintech boom it was venture capital firms who expressed most interest in backing disruptive startups. Now, with Funding Circle listing on the London Stock Exchange last year, it’s fair to say that newer asset classes like P2P are moving into the mainstream. As such, leading institutional investors are pricking up their ears.
I’m delighted that Growth Street is part of these changes. Earlier in January we announced a £7.5 million equity investment round led by the Merian Chrysalis Investment Company (Merian Chrysalis), which is advised by Merian Global Investors, a global asset manager with a total of £31.6 billion under management.* Merian Chrysalis is supporting our view that for too long, the UK’s business owners have been underserved by the incumbent financial services giants.
I think the scale-up investment by Merian Chrysalis is a sign that leading institutions are thinking differently about the SME ecosystem. So why are these institutions registering their interest now? In my view, changes to the regulatory environment have helped.
A few years ago, the FCA had not yet begun to directly regulate peer-to-peer (P2P) firms like Funding Circle and Growth Street. Now, these new lenders are being regulated and authorised by the FCA.
Importantly, firms targeting SMEs have also become more diverse in the range of products they offer. In the aftermath of 2008’s financial crisis, new lenders found their feet offering relatively simple term loans and invoice finance agreements.
Now, though, challengers are going to market with more sophisticated products. Growth Street’s GrowthLine, for example, works much like a traditional bank overdraft, but it’s been transformed by Open Banking and cloud accounting integrations that provide valuable real-time insights into customer behaviour.
The upshot of these different factors is that SMEs are being seen in a new light. And we shouldn’t forget that this bodes well for people right around the UK: as of 2018, SMEs were thought to be responsible for as much as 60% of private sector employment and 52 per cent of private sector turnover.
These vitally important cogs in the UK’s economy may be getting their time in the sun: I hope that many more institutional investors follow the example of Merian Chrysalis and commit to supporting these great British businesses, whatever the weather.
Greg Carter FCA is founder and CEO of Growth Street
*As of 31st October 2018.
Growth Street Exchange Limited (company no. 09495712) is authorised and regulated by the Financial Conduct Authority (FRN 739318). 5 Young Street, London W8 5EH. Business to business lending is not regulated by the Financial Conduct Authority.