Page 3: Investing in SMEs
The MacMillan Committee report, in 1931, examined the financing of small firms and discovered it was extremely difficult to raise long-term finance in amounts of less than £200,000. This became known as the ‘MacMillan Gap’.
Though, over the years, there have been a number of changes and opportunities in the ways that SMEs are financed, it is still the case that many smaller business owners feel that they are penalised by markets because of their size. The concept of the ‘gap’ therefore still exists and it is still more difficult to raise finance for small rather than large businesses.
It has been said that a small firm is as different from a large firm as a ‘caterpillar is from a butterfly’. As SMEs only have a small share of the marketplace, they tend to be price-takers rather than price-makers. However, unlike large organisations where management may often be about control and organisation, SMEs have considerable flexibility, mainly because the relationship between the business and the main investor is very close.
Although the risks involved in investing in SMEs are greater than for those of established companies, there is always the opportunity of larger overall returns. SMEs also by their very nature have far greater growth potential. Many of the corporate giants today were, only a few years ago, SMEs themselves. For example, Seton Healthcare plc was floated by Beeson Gregory in 1991 with a value of £20 million and has today through acquisition and growth progressed into a one and a half billion pound company, manufacturing and supplying branded healthcare and consumer products.
There is a clear link between the growth of smaller businesses and the arrival of new technologies. In recent years, the growth of information industries has been fuelled by some spectacular successes, particularly in the area of high technology. Large institutional investors are frequently attracted to the high growth of SMEs. Although the bulk of their investment portfolio is in large steady companies known as ‘blue chips’, they often invest in SMEs in order to provide a more balanced range of investments, which have potential for higher growth.