Corbett Keeling has been raising finance for private companies since the mid 1990s when what was then referred to as the funding gap for early stage companies began to be plugged to some extent by private investors. The funding gap is back and Corbett Keeling talks to EVCJ about how the market for private equity fund raising has evolved and how the current market circumstances could provide growth opportunities for the firm itself.
All during last year we got numerous enquiries from companies looking to raise funds but the answer was that the investors had completely packed up and gone away. The only people who were going to support companies were those that had already invested in them,” says Simon Keeling, director of Corbett Keeling. This statement is validated by four fund raising mandates executed by the firm towards the end of last year and the beginning of 2002. It raised a fifth round of funding for Radiant Networks from existing investors (having already raised the other four rounds) and existing investors in Ship Serve, Euro Celtic Airways and Lingaphone, which did a rights issue, also dug into reserves to keep their investee companies on track.
Simon Keeling says: “In the case of Radiant we made strenuous efforts to interest new investors but there wasn’t really a lot of interest. We went to a lot of meetings but all of the private equity investors, whether UK, European or US, were nursing quite difficult portfolio companies and potential investors in their funds had lost confidence and were no longer willing to provide new money and so the money that was left was being used to patch up the walking wounded in their portfolios.”
Arguably Radiant, Ship Serve, Euro Celtic Airways and Lingaphone are the lucky ones in that they have a track record to tout to their existing investors. Those looking to raise private equity for the first time are finding it difficult. “Now you find that very few businesses or ideas are getting funded unless investors can see that with one round of funding the company is going to get to cash flow break even point,” says Simon Keeling. The investing environment has become increasingly hostile, says Simon Keeling, for private investors who find that now prices and valuations are not spiralling upwards their equity dilution at later rounds of funding is becoming too much to bear. Consequently, private investors, unless they have the resources to invest at every funding round, are finding the market far less appealing and in some cases disappearing altogether.
In general Corbett Keeling finds the private investor market pretty fluid in that investors move in and out of the space and have varying tastes and amounts of money to spend. On the subject of marketing to high net worth individuals, now enshrined in the UK’s latest financial services law reform, Simon Keeling says: “One had to tread a more cautious path before these new regulations came in. Quite often you find that potential private investors work in investment banking dealing with these things every day but when dealing with it on a personal basis some flounder around and were actually quite well protected by the law.”
Although private investors are often part of the finance sourced by Corbett Keeling they are by no means its only recourse. This is not surprising given that the average equity finance raised ranges between GBP500,000 to GBP20 million. Below the GBP2 million mark the firm finds it has little to zero competition to contend with and is often referred deals by larger advisory and medium-sized broking firms. All fund raisings have three necessities today, says Simon Keeling: breakeven achieved within that funding round, Intellectual Property Rights must be protected and what the business model or market the firm has chosen to operate in, it must be validated.
The good news in all this for Corbett Keeling is that the firm is still busy and in fact changes in the market may lend the firm to gentle expansion. Both Simon and Jim Keeling are clearly thinking about what future direction the firm might take and are aware that there are a number of experienced investors and advisors on the job market thanks to today’s retrenching banking and investment markets.
During the last year the two brothers have been joined by Paul Urby – someone they got to know through their work for Lingaphone. Urby works as an associate with the firm and the arrangement basically means that the Keeling brothers share deals and fees with Urby on a deal by deal basis. The firm is about to expand further with a similar arrangement with an experienced investment director recently let go by 3i when it was restructuring its UK network. “The regulatory cover provided by Corbett Keeling means someone like this can go out and have a serious conversation with people and not fall foul of the FSA and if he finds a deal we can help execute and share the fees,” says Simon Keeling. “If you go for more than a year you potentially run the risk of having to retake the exams but you can keep current by coming under the Corbett Keeling umbrella.” Corbett Keeling is regulated by the FSA.
If this loose arrangement proves successful the Keeling brothers have not ruled out bringing these additional advisors onto the payroll. “If you were able to take the business to 20 to 30 people the idea of someday selling the business would not be so unrealistic,” says Simon Keeling.