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BGF: subsea companies may face bigger challenges in upturn than downturn

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Oilfield Technology,

Like everyone else, BGF are encouraged by the positivity coming from the recent coverage of the subsea sector.

In its latest business activity review, published in the run-up to Subsea Expo, Subsea UK says that the subsea industry has turned a corner, with strong indications of increased activity and a prediction of almost 9000 new jobs by 2022.

That is good news for a sector which has had to work hard to keep its head above water in recent years. After the severity of the downturn, order books are filling up again, new projects are being commissioned and there is increased confidence for the future.

But this industry is nothing if not cyclical so this is the time when ambitious companies should be thinking ahead not just to the next few months of activity, but fast forwarding two steps ahead to make sure they have funding in place to ensure a sustainable future over the next few years.

Coming out of a downturn and securing new projects comes with its own challenges. If projected revenue suddenly increases from 5 million to 10 million, companies have to fund that growth long before they are paid for the work. They have to buy materials and hire additional staff. Add to that cash flow problems because in many cases they are operating on lower margins and with customers who have stretched their payment terms. As a result, some companies will struggle, ironically more in the upturn than they did in the downturn. One of the things they then have to consider is working capital financing.

In the first instance, companies should be in discussion with their banks, but they may also have to consider additional options for securing working capital. If the upturn is quick and they are doubling the size of their business in a year, the funding required could be outside the risk appetite of the banks. If they want to fund other investments in addition to day-to-day working capital, the amount required will be even higher.

There are various sources of finance options starting with pushing for phased payments from customers, but also banks, supplier finance facilities and equity investors like ourselves.

These are not mutually exclusive and in reality, firms would want to use a combination of all of them to get the balance right in terms of a sensible level of financial risk.

As an investor, I am always interested in talking to proactive management teams who understand that an injection of funding from an investor might help them meet current funding challenges and open the door to new opportunities which they might not otherwise be able to capitalise on. Timing for this is crucial and it is important that businesses have these funding conversations early enough, while they are still in a position of strength, have control of their own destiny and the freedom to consider a variety of funding scenarios.

Partnering with an equity investor such as BGF will deliver a more robust foundation, flexibility to react to new opportunities and the support of a partner with a two-billion-pound balance sheet who is incentivised to help their company. A consideration for a lot of owner-managers is that access to additional funding from an investor can speed up the potential for them to exit the business or sell it on in the future.

Yes, there is a trade-off of some dilution of ownership for financial flexibility and resilience - I know that is not for everyone. Taking on an equity partner will mean some changes, but it is a partner who wants to help not restrict innovation and growth and has a vested interest in success and achieving results for all the stakeholders. If we hold someone back, all we would be doing is undermining our own investment.

I place a lot of value on building a strong relationship, it is not just a pure numbers game, it is about working together.

Author: Richard Pugh, BGF

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