Private capital ready to support UK SMEs with recovery from Covid-19 crisis

High Net Worth private investors are ready and willing to provide small and medium-sized British businesses (SMEs) with the financial support they will need as they recover from the impact of Covid-19, reveals research by Connection Capital, a specialist private client investment business.

According to a survey among 233 Connection Capital clients with an estimated combined net worth of over GBP2 billion, nearly three-fifths (58 per cent) say they are interested in private equity as an investment strategy over the next 12 months, while almost a third (31 per cent) are interested in private debt.

Connection Capital says that previously successful businesses that have benefited from government aid during the crisis will need to find long-term, sustainable financial solutions as they emerge from it. 

It warns that many companies will need more flexible capital options than most traditional lenders can offer once government debt packages come to an end or as growth gains traction as the economy recovers.

Claire Madden, Managing Partner at Connection Capital, says: “When the sticking plaster of government intervention comes off, SMEs will need a more permanent financial fix that is suited to their needs. Private equity or private debt could be the answer and private capital is ready to provide it.

“Even fundamentally sound businesses will continue to be very stretched coming out of this crisis and they will need flexible capital to help them navigate their way back to normality – or whatever normal looks like post-Covid.

“Banks’ rules are rigid and they may not be able to provide finance on the terms small and medium sized businesses need. Institutional investors may overlook all but big businesses and may not be geared up to act quickly or flexibly enough.

“Private capital is entrepreneurial. High Net Worth investors are prepared to take an opportunistic approach to capitalise on attractive investment prospects when they see them. Many have purposely increased their liquidity in recent weeks for just that purpose.”

The research found that more than half of respondents (53 per cent) have increased their cash reserves since the start of the crisis, with the primary reason being to provide liquidity for investing in opportunities in alternative assets such as private equity and private debt.

Madden adds: “Many businesses are going to be facing significant structural issues once the crisis recedes, and they’ll need to be financed appropriately.”

“For some, equity investment will be the best solution, while debt will be more suitable for others – but crucially, debt that fits the business’ specific requirements. For example, that might mean structuring loans with a final bullet repayment to enable cash generated to be deployed within the business while it gets back on its feet, or less restrictive ‘cov-lite’ options where appropriate.

“Unlike banks or institutional investors, private capital has the freedom to structure each transaction on its own merits instead of having to stick to a standard set of rules, and to commit follow-on rounds of investment as it sees fit. Businesses were increasingly investigating alternative financing options to traditional bank lending even before Covid-19 hit. Now that trend is likely to accelerate.”