Energy Voice | ‘Demand is surging…it’s a sign we have turned a corner’ says BGF investment head

The Business Growth Fund’s (BGF’s) investment director hasn’t been this busy for three years.

After a slow start to the year, Mike Sibson said that the organisation was having a “lot of conversations” about new opportunities and funding requirements.

In the north-east, BGF has “just about agreed terms” to provide funding for another business and is starting due diligence on six or seven others.

“The pipeline is really good,” said Mr Sibson, who believes the BGF’s progress since its formation has been “extraordinary”, with about £1.5 billion invested in 220 ventures across the UK.

“We’re still seen as the ‘new kid’, but we’ve been going for seven years and are getting really well established,” he added. BGF was set up in May 2011 to fill a funding gap for smaller and medium-sized businesses, with backing from five of the UK’s main banking groups – Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered.

BGF’s Aberdeen office makes about three new investments every year, while also doing around three follow-on investments in its existing portfolio.

That equates to £20 million in first-time investments and another £10m in follow-on investment per year.

It currently has about £100m invested in 13 companies in the north-east, while BGF’s Aberdeen team is also involved in any oil and gas related investments in the rest of the UK.

Supply chain companies like Aubin, Front Row Energy Technology Group, Petrotechnics, Rovop, Spex and Stats have all benefited from investment.

Mr Sibson said BGF expects to hold an investment for around seven years, though there is no strict rule regarding the time span.

When Energy Voice interviewed Front Row two months ago, they said the beauty of BGF was its provision of “patient funding”. In a nutshell, it understands technology can take a long time to develop.

Mr Sibson said: “We know it takes time to commercialise a product.

“Front Row, for example, has fantastic inventors and is starting at the very beginning with some of its technologies.Even with their skills it takes a long time to get to market.

“Getting commercial tools tested and certified takes a long time. That’s what we’re all about – having the patience to support developments.”

The current environment for technology development appears to be strong thanks to operators’ determination to reduce costs.

“Hammering” supply chain rates has been part of that drive, though that approach is clearly not sustainable. Those gains will quickly be lost when the market picks up again.

Furthermore, rates are low partly because there is so much supply in the market, but that overcapacity will inevitably come out.

The other way to keep costs heading in the right direction is to develop new technology and come up with new ways of working.

Mr Sibson said other industries had been far quicker to realise the importance of collaboration and embracing new technology to lower costs.

He said the automotive industry looked to its supply chain to deliver 5% cost reductions every year. “We have to do that to give majors what they want,” Mr Sibson said.

The downturn seems to have encouraged more operators, and even tier one contractors, to open up to this possibility.

This means fledgling technology companies can finally get a foot in the door and find operators who will try out their products, which is so often a massive hurdle.

Mr Sibson, who used to work for investment management firm 3i Group in Birmingham and Cambridge, said: “A lot of people lost jobs and got paid off during the downturn.

“That is often the genesis of a business. Behind every business there is a courageous decision. I always ask when I meet companies, ‘how did you get started?’. At some point, someone made a courageous decision and that tells you a lot about that business.

“People see opportunities in a downturn because it’s all about cutting costs.

“A lot of the companies we have invested in are focused on doing that more efficiently. Lean years drive a lot of innovation.”

But with an improvement in oil prices, the concern is that oil producers and larger suppliers will get back into the old habit of being risk averse and afraid to be the first to try something.

However, Mr Sibson, who is also a former drilling engineer at Shell, thinks those concerns will prove to be unfounded. He acknowledged that oil companies perceive a lot of risk in running new technology in wells and on production facilities. But he believes businesses with strong technology content can deliver healthy returns on investments.

Furthermore, he is confident that costs are currently at “acceptable” levels in the North Sea, which should encourage investment.

“The market is improving, there’s no doubt about that,” Mr Sibson said. “Demand is going up dramatically and a lot of companies are growing.

“With that, working capital requirements will go up.

“It’s a great sign that industry has turned a corner.

“Companies’ performance and outlook is improving, but most of them are not yet confident enough to invest in more facilities and new machines.

“We are at an early stage of recovery and expect over the next year or two to see much increased demand for investment. In fact, we’re already starting to see it.”

BGF has invested in oil service companies, which tend only to make money when operators decide they are going to spend.

But the purse strings have been tight at a time when operators’ focus has been on repairing their balance sheets.

Despite oil companies’ reluctance to believe crude prices have recovered fully, they are committing to long-term projects.

It means they’re thinking hard about investment, and that bodes well, Mr Sibson said.

At the same time, the market for inspection, repair and maintenance and small construction projects is “really picking up”.

Mr Sibson: “There is a lot more activity and work in the market, but pricing has yet to improve. That will take time as overcapacity comes out of the service sector.”

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