The broker who says small firms have to come up with big solutions

The conventional wisdom is that it is next to impossible for small firms to raise cash, but Phil Adams, chief executive at independent investment broker Altium, says that the picture is more complicated than that.

“It is pretty straightforward to raise cash if you are a well-run high-growth firm expanding by around 15 per cent a year,” says the 43-year-old banker from Liverpool. “But it is harder now if you have a speculative venture or are a start up.”

Adams, sitting in the firm’s bright wood-panelled ground-floor meeting room in St James’s Square, adds: “Investors also like to seem a firm that has some exposure to the fast growing markets in Asia or the Middle East. This is because the perception is that the UK and Europe will undergo years of low growth.”

The banker, who caters for small and mid cap firms, adds that life in the retail industry “will remain tough” over the year ahead. However, he sees a lot of investor appetite for green energy companies or businesses with a strong ecommerce element. And indeed his bank is investing in these areas by hiring analysts and other staff to work in these sectors.

Altium is a mid cap investment bank that raises cash for firms with market capitalisations of between £50m to £250m. It raised £26.5m to take restaurant chain Carluccio’s onto Aim in
2008, and advised on the £178m management buyout of drug maker Goldshield last year.

The bank, which was originally created as the finance arm of private equity house Apax Partners in the early 1980s, is retained by 35 clients – including Domino’s Pizza, Irn Bru-maker AG Barr, and retailer Mulberry – and can also offer them financial modelling and debt and turnaround advice.

The bank has a regional office in Manchester, and a number of European in cities such as Zurich, Munich, Madrid and Milan. Adams says the firm, which is owned by its 140 employees, turns in sales of £35m a year “in a bull market.” This dropped to around £20m in 2010, in the wake of the financial crisis, when lucrative initial public offerings (IPOs) for banks remained way off the levels seen during the boom just four years ago.

Currently, the bank’s business is spilt evenly between its securities and corporate finance arms, but when cash was freer five years ago this split was two thirds/one third in favour of the securities side of the business.

The banking industry, particularly at the mid cap level, is living on nervous energy, waiting for the return of the IPO market.

This is because the retainers mid cap stockbrokers are paid by clients are quite small, but are accepted on the understanding that they will be allowed to take part when the firm wants to raise some cash. “We operate on success-based fees,” says Adams. “If a deal does not go ahead, we do not make any fees.”

The boom times at the start of the decade allowed over 140 brokers to grow up around the Aim market alone. Many observers expected a wave of failures and consolidations in this area after the credit crunch.

This has not happened, partly because of the egos and the different cultures that abound between the various brokers, making consolidation painfully hard. But there is another, more prosaic reason: a fundraising brings so much cash into a brokerage it can often survive on this cash for extended periods.

Adams says: “The market is overbrokered. There is room for consolidation, but there is not much of it about. It is amazing how weaker houses can keep going. IPOs are superprofits. Firms can keep going on the back of these, even though there are fewer of them around.”

Altium was itself the subject of intense merger speculation in 2007, when it came close to a deal with City rival Arden Partners. “We had reasonably meaningful discussions,” Adams admits. “But they came to nothing.” He now says that although they get approaches “the business is very much not for sale.”

As an example of how weak the IPO market has been, Adams says his firm has handled 10 public-to-private deals in the last 12 months alone. He says: “You don’t see a lot of public-to-private deals when the IPO market is strong.”

However, flotations at the lower end of the market may take some time to come back as investors become more discerning. During the boom years for Aim IPOs throughout much of the last decade, a number of firms came to market with leaky business models and inadequate corporate governance. Some investors paid the price. Adams admits: “A lot of stuff went out on Aim that was not of the right quality.”

Some of the firms traditionally operating in the small-cap arena – the likes of Collins Stewart, Numis or Evolution – have reacted to this by trying to take on the bigger investment banks in a bid to attract blue chip clients. Collins Stewart, for instance, became the broker to its FTSE 100 client goldminer Randgold Resources in November.

But Adams says Altium has instead tried to cover more of the mid cap area it already occupies. Over the last two years the business has began for the first time to raise cash for other funds, and to move into money management for wealth funds. The business has also spent the last several months trying to get approval to open offices in the Middle East.

Adams says: “We have hired a guy out there and he and his team have been working on regulatory approval. We expect this to happen in the first half of next year. This will then allow us to get to the sovereign and family wealth funds out there to raise cash.”

The days of IPO superprofits may be off the agenda for a while, but Adams says investors are still willing to lend cash to resourceful companies with strong business plans. He also adds: “Private equity is back in the market strongly, and are paying good prices for firms.”

The figures seem to back Adams up. Last year 164 deals were completed worth £18.2bn, compared with just £4.7bn from 122 deals in 2009, according to the Centre for Management Buy-out Research, which is sponsored by Ernst & Young and Barclays Private Equity.

The largest buyout deal in the UK was the £2.9bn public-to-private buyout of engineering company Tomkins by US private equity group Onex, but a flurry of smaller deals came underneath that.

Sales are undoubtedly being made, but these are still way off their 2007 levels.

At the beginning of 2011 the signs are that investors are not ready to swallow the riskier investments they thought little of just four years ago. The City shall soon find out whether this changes as the year progresses.

CV | PHIL ADAMS
Age: 43

Work: Arthur Andersen as a chartered accountant for four years until 1995; joined Apax (as it was called then) in 1996; ran the firm’s Manchester office from 2002 to 2007; became UK chief executive in 2007; became group chief executive in October 2010

Education: Nottingham University, where he read Classics

Family: Married, four children

Lives: Family home in Manchester, Hale and spends three to four days a week in London at the Landsdown Hotel

Hobbies: Liverpool FC, tennis, running