Picking winners involves hard work and diligence

Jun 30 2009 by Karen Wilson, The Journal

THE enduring success of Dragons’ Den has brought the process of obtaining investment capital into the public spotlight, albeit in a rather truncated and dramatic fashion.

The actual way in which a company goes from putting forward an initial business proposal to receiving the investment it is looking for is somewhat less televisual, and relies much more on detailed assessment and research.

The majority of initial enquiries that NEL Fund Managers receives come through business intermediaries, whether a law firm, accountant, banker or other type of adviser.

Simon Johnson, senior investment executive at Evolve Finance, NEL’s specialist debt and mezzanine finance division, said: “Around two-thirds of the enquiries that come in do so by this route, though we do also get a significant number of direct approaches from companies.

“The region’s professional services community takes a joined-up approach around business investment – firms know what we have to offer and put forward clients to us that they think will make the grade, and we find that investments that come to us in this way tend to end up being amongst the best performers.

“We are also happy to hear directly from potential investees, and the investment team also makes sure we are represented at relevant networking events, to get the message out as far as possible into the business community.”

If a proposal gets past this first assessment, an introductory meeting is set up between the potential investee and the investment team to discuss the basic premise of the opportunity face-to-face. At this stage, the investee might not have a formal business plan in place, and the discussions can help to begin to shape how this might look.

Presuming that all parties agree that the idea has potential, an NEL executive is given responsibility for the deal and takes it before the company’s weekly investment team meeting, to begin to flesh out the details and to ensure it fits within NEL’s remit.

Nick Edgar, investment executive at NEL Capital, NEL’s specialist venture capital division, added: “Putting the proposal up for what is essentially peer review means any immediate issues around the people involved, the sector in which the company operates or the commercial idea itself can be identified and resolved.

“The experience of the people involved also means that new ideas can be added into the mix at what is still a very early stage.”

After this point, the process becomes more formalised – an investment offer begins to be structured by the investment executive, whilst a period of comprehensive due diligence is undertaken, involving detailed research into the company’s past, present and expected future performance. The Investment Committee reviews the proposal at this stage and agree the terms.

Joanne Pratt, investment executive at Evolve Finance, said: “Historically NEL has provided up to £500,000 as equity, or mezzanine debt, or a mixture of both, so this obviously means we have to look at every aspect of the company’s operations, from its previous years’ accounts and future forecasts to its management team’s career history and achievements.

“The process takes a minimum of four weeks, but we aim to keep investees informed as things progress, and to involve them directly as required, so that they can see the investment application process progressing.”

On completion of the process, a file review is undertaken (quality assurance and compliance), and the finalised proposal is given ultimately sanctioned by the Investment Committee. The final stage of this process is for the NEL executive to draw up the requisite documentation and set a date for the completion of the investment.

Simon Johnson said: “We try to make the investment application process robust, but manageable, and most of our investees say that, putting the money aside, it is beneficial to them, as it makes them fully re-examine their business plan to ensure that it’s really going to achieve what they’re looking for.

“For an uncomplicated deal, it usually takes around two months to go through the investment application process – we’re keen to invest in good quality ideas and people at all stages of a company’s lifespan, and the continuing flow of proposals we receive proves day after day that our region is home to a great deal of high quality businesspeople and companies.”

Historically NEL has provided up to £500,000 as equity, or mezzanine debt