Whether it's funding a specific project or seeking longer term strategic investment, there are options available to help businesses capitalise on future growth. So, with the current economic and commercial uncertainty for some businesses, what are the considerations that businesses should make if they are looking to attract external funding?
In this episode of Navigating the New Normal, Pete Burgess, Partner in Corporate Finance, and Simone Barker, Director in Innovation Incentives, discuss how they support their clients to secure funding in order to grow, what ‘good’ looks like for different sources of capital, as well as the industry trends and tailwinds to look out for in the current Australian market.
Welcome to Navigating the New Normal, Grant Thornton's podcast, exploring trends in business and the marketplace.
I'm Rebecca Archer, and today I'm joined by Simone Barker, Director in our Innovation Incentives and Government Grants team, and Pete Burgess, Corporate Finance Partner at Grant Thornton.
With the current economic and commercial uncertainty for some businesses, all avenues to attract funding for business growth should be explored. So, what are the ways that businesses can attract more funds to maintain and grow market share?
Welcome Simone and Pete.
Thank you. Lovely to be here.
So, first off, can you tell us a bit about what you both do?
Both Simone and I work for our clients, so we're not working on the fund side or the investment side. We're actually working for our clients in helping them access growth funding.
So, Simone works mostly on the project-based finance, so around government grants, whereas my aspect is more around the business growth. So, I'm working with businesses that are looking at unlocking growth through capital, whether that be debt or private equity, to essentially access markets that they wouldn't been able to do by themselves.
Yeah, so as Pete mentioned, Simone Barker here, Director in the Innovation Incentives team, and I help businesses to access funding from government. So, government grants support businesses by co-investing in a strategic project as opposed to a business more broadly.
So, we work with state and federal governments, and they're looking for projects that will not only help a business grow, but also have a project that will have a broader economic impact. And the way I work with clients is in a number of different ways, but broadly, we help to identify growth projects that are likely to be of interest to government. We help our clients to monitor the grant's landscape – so to identify grant programs that have strong alignment to a client's project pipeline and obviously, strong alignment with a grant program means a greater chance of success. And then we help our clients to prepare really robust applications to a qualified grant program.
So, I'm curious as to what exactly ‘good’ business looks like from your different perspectives?
Yeah, so just carrying on from what I was saying, from a grant's perspective, really having that broader economic impact in a project is good for a grant – it’s really essential. Government is looking to support projects that are going to create new jobs or establish a new industry, perhaps grow an existing one, or even perhaps to support development of new technologies, and that's something that we're really seeing in the clean energy sector at the moment through government support.
And aside from that, those aspects – government is using taxpayer money to invest in projects, so they're really keen to understand that any project that they might invest in is going to be successful. And so this means that a business and the project they're putting up has to have a lot of documentation and analysis that they can present to government – whether that's through a project plan that outlines how a project aligns with the business's core strategy, a business case that identifies the expected commercial outcomes and validates the need for the project. There will be a level of scrutiny, as there should be. And along with that goes an overview of the delivery team, their track record of success and aspects like that are key. And then aside from that, policy alignment is also really key with grants.
So, project outcomes where the benefits align with the political agenda, again things like job growth building, workforce skills, industry development – and that's where my team leverages our strong understanding of public policy and the landscape to identify which projects are likely to attract grant funding.
In a similar vein, Rebecca, instead of the government being our major stakeholder for us, we typically tend to look at the investor and what they're looking for. So, a lot of that comes back to – and we'll probably speak about this later – but industry tailwinds and it completely is dependent on the size of investment, the type of investor. So, whether it be growth capital, private equity, private credit, there's different indicators of those businesses which are really attractive to those separate stakeholders.
But I guess there is an undercurrent of what ‘good’ looks like in those businesses and similarly to the government grant work, it's that compelling business plan, it's the value proposition, it's the opportunity to see significant growth from the investment that's made – it’s the team credentials and track record. At the end of the day, equity investors and credit investors are investing in the people that are running the business. Typically, the businesses that we're working with, the family-owned businesses and have been for either a short period of time or a long period of time and they're looking at bringing in institutional capital. So, it really is about the quality of the management team as well.
And in a lot of instances there's succession plans around those management teams as well and then the strong commercial outcomes is a very important piece. We have investors that are looking for return on their capital. So, it's not just about creating a job or creating a new factory. This is about three 3x their return over a pretty short period of time. And that's I guess, leading into those other differences is that there is a requirement for a realization event, particularly in private equity. You know, anywhere from growth equity all the way through to buy up private equity, there is a requirement for a realization. So, they need to sell the business in order to make capital for their investors. So, there's a pretty big mindset change from taking on nondilutive capital to taking on capital that will require you to have a realization event in the next sort of three to seven years.
We also see that a lot of the time that they're looking to take on a Board role within our clients and they are looking at the overall business and the future industry rather than just a discrete project. So, I guess there are a few of the differentiators from the work that Simone does, but there are a lot of similarities as well.
And do these factors depend on the size of the business at all? How much of an impact does that have here?
Yeah, absolutely. So, from our perspective – from an equity perspective – it really dictates who and where you can speak to and attract a capital from. So, for example, in broad strokes in the Australian market EBITDA, so earnings before interest, tax depreciation amortization, between $1m and $3m is probably attractive to a pretty small number of investors. So you're looking at really their Family Offices, some discrete growth capital investors.
So, when you start ticking over into that $4m EBITDA market that you have access to a whole bigger range of private equity capital So essentially, I would say that size is a very big factor in what we do and helping businesses bridge that gap between profitability. So, break even to getting to that $4m mark is a big piece of what we do. So, the early strategy work in helping create value within an organisation.
I'd echo what Pete's saying in terms of size of business being a pretty big factor in grants as well. It is looked at it slightly differently, but there's certainly different categories of funding targeting businesses, I would say at different stages of maturity.
So, to give a couple of examples, there'd be grants to support R&D and commercialisation activities. So, these could be startups or pre revenue businesses and these grants are often to support bringing something new or novel to market. So perhaps a new product or service or process. Then there's grants for small and medium sized enterprises – so SMEs – these grant programs support businesses to scale up and grow. So, it could be to support expanding an existing facility or supplying a new market. Perhaps there's an export market that a business wants to supply, and a new piece of equipment would help them to do that.
And then there's grant programs for larger scale businesses. Potentially these kinds of programs are less frequent, although at the moment we are seeing some bigger programs coming out targeting this bigger end of town and they are often around supporting industry transition. So, at the moment we're seeing support for things like decarbonisation or clean energy as an examples of this larger scale grant program. And grant programs – having the government as the investor – have a set of guidelines and those guidelines outline that political policy alignment that I talked about earlier, but also the supporting information and what outcomes they're looking for. So, when Pete talked about the realization event in grants it's know what is the outcome from this government investment that is going to have a really beneficial flow on impact to Australia or to a state at large.
So, checking those guidelines is really important and that's where we support our clients to get that alignment, and you would see changes in the quantum of information, complexity of the details requested from governments around those different categories of funding.
I'd be curious to hear what you're seeing in terms of industry trends at the moment – what’s happening?
So grant landscape is very much impacted by political cycles as you could imagine. So, the change in federal government in 2022 has really sparked a major refresh in national public policy and this is now flowing through to grants.
I think I mentioned already decarbonization clean energy – very big themes that we're seeing coming through federally but also coming through states as well – big support for those initiatives and flow on from that circular economy. So, thinking about sustainability and the way our manufacturers and our operating is very much front and centre at the moment, as is a push to reshore manufacturing impacts from COVID and supply chain issues that were caused during that time. Two major federal grant programs that are being rolled out by the Albanese Government – the National Reconstruction Fund and the Industry Growth Program. The National Reconstruction Fund offering loans and equity investment and we're seeing state governments setting up programs to support this big federal program and then the Industry Growth Program, which will offer matched grant funding, which is actually under design at the moment.
So, I feel like post though the political change and some reviews that have been going on, there's a real galvanisation in the grant sector to kind of support up into those key themes.
And similarly, to Simone, I think we see the bad news is actually good news for investment. So, anything you see out there in the press around, for example cybersecurity, ESG, you know, supply chain constraints, they're all significant opportunities in private equity and that's where we see the tailwind.
So, whenever there's an issue, there is an opportunity and we certainly see that at the moment we've got the vast majority of private capital that's going flowing into private equity is actually from our super funds in Australia, whether that be Australian super funds or overseas pension funds or overseas significant wealth funds – and it's really big push on ESG investing. So we're seeing funds in Australia set up discrete and separate funds which are investing purely into ESG style businesses. We're also seeing a pretty significant investment in onshoring. So manufacturing, smart manufacturing, efficient manufacturing. We lost a lot of that in Australia over the last 50 years as a result of wage prices, but with automation and smart manufacturing actually seeing that come back onshore which from the consumer's perspective sees confidence in supply as well.
So, there's a lot of, I suppose tailwinds in the industry that we're seeing, which are flying through both government grants but also through the private capital market. And I would say there's certain subsectors – for example within technology there's AI, which is a really hot topic at the moment, but probably very much more focused at the pointy end. So venture capital and I would say over the past five or six years that's been similar to the ESG angle as well. It's been in the venture capital space but we're actually starting to see that really bleed into the private capital market at the moment, the private equity market. So yeah, it's going to be an interesting couple of years. Yeah, be great to see what happens.
And what about any industry headwinds that we're seeing right now? Can you maybe give us a little bit of information about what's out there, what feedback you're getting and what you're seeing overall for businesses that's causing a potential obstacle?
Yeah, absolutely. I mean, a lot of this would be widely publicized but I think during COVID we saw significant growth in businesses that were direct-to-consumer and, you know, all online. We've seen a retraction – a significant retraction from that from the consumer. And with the tightening of budgets around increased interest rates, discretionary items and particularly direct-to-consumer has come off the boil. As a result, I guess with the private equity funds and venture capital funds looking forward to see where the pinch is going to be, we have seen a significant retraction from that sector alongside, I suppose, the cash burning technology, which, very much has been in the past two or three years, fueled by venture capital. We've seen a pretty significant retraction from overinvesting inflated values into technology. And having said that on both sides of those headwinds there's opportunity. So good businesses within those subsectors are always going to survive and when if they survive they'll come at the other end and be one of few that have survived and they'll be really attractive in that next cycle and ripe for investment. So, there is an opportunity in that as well – ever the optimist.
From a grant's perspective, some of the headwinds tend to be around those political cycles that I mentioned. So, another example is, aside from the change of federal level government, we've also had a change of government in New South Wales. And unfortunately, these changes in government cause disruptions to the grant cycle.
You know, some programs get put on hold or go under review or new programs get developed like the National Reconstruction Fund and the Industry Growth Programs that I mentioned. But what this means for businesses is that the grant support that they sometimes need to rely on to get those projects out at a bigger scale or get better technology or to deliver them faster, have been missing. There's been a gap for a significant amount of time now at a federal level where programs have pretty well been offline for about twelve months.
New South Wales programs we're hoping to see come back online towards budget – state budget time, September this year. But disruptions in government support along with inflation, they're really restricting businesses growth agendas, which just means that any open grant programs at the moment are becoming a lot more competitive because there's more demand and businesses are seeing that support as being less of a nice to have and more of a really critical element to delivering their strategic plans.
And for businesses that might be looking for this kind of help, whether it's private investment or government grants, how should they find out what they can do and how to access these things? I can only imagine it must seem quite overwhelming to a lot of organisations.
Yeah, there's certainly a lot going on in the grant space, and even more so at the moment with new programs coming out at a federal level. I do post a lot on LinkedIn, so I try to keep my clients updated with the day-to-day new programs opening or updates in that area. So, I'd welcome anyone to reach out and follow me there. Otherwise just reach out through my details on the website. Happy to have conversations about the project pipeline that people are looking at and again identifying which projects might be suitable for grant funding.
Thanks, Simone. And Rebecca. Similarly, I think a lot of the work that we do, particularly in the early stages of founders and business owners considering private capital, is the education piece. So, we work with founders of businesses on a regular basis to really take a look at their business and understand where they're at, how attractive their business is to private capital, and then help them position themselves so that they are most attractive to that private capital. So similar to Simone, feel free to add me on LinkedIn, but I'm a talker, so happy to take a phone call. My mobile is listed on our website, so feel free to reach out.
I'm wondering if you've got any sort of insights into what's out there in the next maybe twelve to 18 months or even beyond that in terms of business growth? There's a lot of uncertainty with higher interest rates, cost of living, inflation crisis, things like that, that we're hearing about on a daily basis from the media.
But is there a different perspective that needs to be given to this in terms of – business is a long-term venture most often and we need to sort of get some context around that kind of thing?
Yeah, absolutely. I guess we're dealing with this on a daily basis. You're making an investment in a business or you're making decision for your business based on a longer-term view than just the next six or twelve months.
I think we, as consumers, make a lot of decisions every day based on how much money we have in the bank. Whereas a good business owner should be looking through that, and looking at the next three to seven to ten years or 20 years if they want an intergenerational business.
So, what I will say is there's still a significant amount of capital out there looking to invest into good Australian businesses and there's still lots of great Australian businesses performing really well. Not to say that things won't get tighter over the next six and twelve months, but we go through cycles, and that's the reality as a business. Being prepared to go through the ups and downs is a really good indicator of the quality of your offering, the quality of the people that are around you and the structures and systems that you've got in place to ensure that there's discipline within the business.
So, if you're one of those businesses that is feeling the pinch but you can ride it out, then there's certainly an opportunity on the flip side of that. And then, I guess on the more negative side, we are starting to see an uptick in more distressed opportunities in the market and a lot of Boards and ownership structures, looking at, I guess, making the best of a bad situation and looking at the way that they restructure their organisations to have to reset realign. Maybe they've got some parts of the business that's not performing and is a real drag on the business, so they're looking at shipping that off or selling that part out.
So, we're seeing a pretty significant uptick in that, particularly I would say of the last three or four months, and expect to see a little bit more of that in the next twelve.
The only other thing that I would add is sort of to wrap it all up and some of the things that Pete and I have both been talking about across the podcast. I think there are difficulties in the market at the moment, but I think there's a lot to look forward to as well. I think with that ESG focus, decarbonisation, circular economies – there’s support and interest now in some quite revolutionary change I think in the way that businesses operate and the way we look at our supply chains and from a government grants perspective, government is supporting that as well, as well as private investors. So, I think that we're heading into some interesting times and I for one, I'm quite excited to see how it all comes out in the wash in a few years’ time.
Simone and Pete, thank you so much for your time. It's been fantastic to speak to you.
Now you've both mentioned LinkedIn, but if anyone listening today would like to get in touch directly to hear more about what it is specifically that you work on and how you might be able to help them, are there other ways that they should contact you?
My phone number is on my LinkedIn page. It's on the Grant Thornton website, so I'm happy for anyone to give me a call or send me an email – all my details are there.
And similarly, feel free to reach out. Contact me via email or mobile phone listed on the Grant Thornton website.
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