Paddy Graham: ‘We need to shout about success’ (pic: Terry Murden)
We are in a room that could be mistaken for one of those lounge bars in Edinburgh’s trendy George Street, except this is Melville Street, the other side of Charlotte Square, where the door-to-door professional services firms have yet to be disturbed by the bustle and beat of the hospitality sector.
Our venue, with its comfy armchairs, sofas and coffee tables, along with a ceiling-high range of spirits, is on the expansive first floor ‘Bothy room’ in the offices of BGF, formerly the Business Growth Fund.
“Sorry if it smells of cheese,” says Paddy Graham. “We had a function in here last night.”
Creating a convivial relationship with client firms is something Graham has been keen to promote after the hibernation forced on the business community by the pandemic.
Patrick (Paddy) Graham has been head of the Scotland and Northern Ireland operations of BGF for just over 10 years and oversaw the move to the west end just before the lockdown. He is pleased to report that, despite the dire warnings of a crumbling economy, business is continuing to flow.
“It has been a topsy-turvy period”, he says, with classic understatement. “But over the last three years we have invested £150 million which, given the environment, makes me particularly proud.”
BGF was set up in 2011 with an initial £2.5 billion fund provided by the big four clearing banks to help scale up companies with good growth prospects. It is now self-financing and making healthy returns.
It provides growth capital for early stage firms, sitting between later venture capital and early private equity. It typically takes a stake of between 10% and 40%. Unlike private equity firms it does not acquire businesses outright.
It has maintained what Graham has previously described as a “sector agnostic” approach to picking firms to support, though tech-focused companies play a big part in the portfolio – about 30 across the UK.
“It has enabled us to understand the sector and the market, and what drives value. It also gives us credibility,” he says.
This intelligence is now being leveraged through its “Portfolio Exchange”, a sort of private LinkedIn launched earlier this year through which the portfolio companies can swap ideas and leads for their mutual benefit.
“It is a really useful tool for the portfolio to gather extremely valuable information on things like supply chains, and foreign exchange,” he says. “It is pretty powerful.”
Belfast-born Graham arrived at BGF from Sigma Capital Group, where he focused on providing development capital into the general tech and clean tech sectors across the UK and Europe.
After qualifying as an accountant at Edinburgh University he was due to take up an offer from Arthur Andersen when he returned from travelling in Australia.
While out there he was following news of the firm’s increasing predicament amid the scandal surrounding the collapse of Enron in the US.
“At first I didn’t quite get the gravity of it,” he says, “but there wasn’t much I could do about it.”
When he came back he was taken on by Andersen’s acquirer Deloitte which honoured the promise to him.
He’s never looked back, securing the BGF role in February 2012 as part of the team building the Edinburgh office.
Deal flow has continued at a good pace, though Graham admits investors and client companies are being more cautious as the cost of debt has risen and market values have become more difficult to judge.
“We are still seeing opportunities and this year we will have another positive outcome,” he says. “We should have another two before the end of the year and probably a record year in terms of exit activity.”
‘Quality speaks for itself’
His division will complete about seven exits, following just one last year. “We are getting deals away because they are good assets. Quality speaks for itself,” he says. “We have to take account of the noise in the market, but we are focused on the longer term.”
This includes continued support, including further funding rounds, in client firms. It has meant persuading some to take more time before accepting offers from buyers, and instead sell more equity that will help them become even bigger – and more valuable. At some point, BGF will want a return, but this strategy means it takes a share in the larger bounty. Its exits average about 2x return on investment.
“We see companies sell too early. If the owners want to take cash out, we encourage them to de-risk, sell a bit of equity, but not sell the entire company,” he says. “We did this with one company which was looking to accept an offer from a buyer. Instead they sold a stake and went on to double the size of the business.”
Because BGF companies tend not to be highly-leveraged it means they have stronger balance sheets to withstand the rise in interest rates. Graham believes the current climate can work in their favour if they are seeking out acquisitions.
It has backed some firms that have floated their shares on the stock market, including Linlithgow telecoms firm Calnex and Edinburgh-based Artisanal Spirits Company, owner of the Scotch Malt Whisky Society. Both have “good fundamentals” and operate in growth markets.
Was the team tempted by the Chris van der Kuyl chaired meals delivery firm Parsley Box when it floated early last year? He grimaces and shakes his head. “We looked at it, but decided not to invest,” he says. On the day we met, Parsley Box announced it was planning to cancel its shares which had lost almost their entire value.
Graham agrees that it has been a rocky year for recent IPOs – Made.com collapsed and Deliveroo has struggled. He expects the M&A market to tighten, but he says US investors remain active as they take advantage of weak sterling.
There is also a growing relationship with the state-backed Scottish National Investment Bank, which has come in as a co-investor on deals – including the Orbex space firm – along with European institutions. He sees this global interest as important in helping promote the quality of talent and companies that Scotland has to offer.
“Orbex is a good example of Scotland being seen at the forefront of an expanding sector,” he says.
“We still need to shout about our successes. It will drive home-grown talent to stay here and attract others to come to Scotland.”
Job: head of investment team at BGF for Scotland’s central belt and Northern Ireland
Education: Edinburgh University (law), qualified as a chartered accountant
Career highlights: Deloitte & Touche, working in the financial services team and the corporate finance department specialising in SMEs ; Sigma Capital, investment director focused on providing development capital into the general tech and clean tech sectors across the UK and Europe; BGF, head of investment team for Scotland central belt and Northern Ireland
What makes you angry?
Individuals not treating others in the way they would want to be treated
Best advice you’ve received?
Always keep an open mind. You never know what may come around.
East coast of Australia. It’s where I met my wife.
Favourite place for lunch or evening out?
Dishoom (St Andrew Square, Edinburgh) and the Canny Man’s (Morningside)
Claim to fame?
Not so much fame, but I played golf for Ulster Boys (5 handicap)
If you could meet three people past or present who would you choose?
Elon Musk, to find out what makes him tick
Serena Williams, to hear her views on success and inclusivity
Sir Richard Branson, just to get his take on what inspires him