Winds of change

Yorkshire’s economy grew on heavy industry, but with it’s gradual decline, can the region redefine itself as a centre for investment in new technologies? Lyndon Driver takes a look.

Winds of change

Yorkshire’s economy grew on heavy industry, but with it’s gradual decline, can the region redefine itself as a centre for investment in new technologies? Lyndon Driver takes a look.

The traditional view of Yorkshire, in the north of England, was as the industrial backbone of Britain. It may not be as valid today as it once was, but the region has to a large extent reinvented itself as a specialist engineering centre.

‘Yorkshire is home to a diverse range of new, high-tech companies, from biosciences and medical devices, to nutraceuticals [food technology], through to new plastics, ending with renewable energy such as carbon waste management and photovoltaic technology,’ says Howard Kew, chief executive of Financial Leeds, a membership organisation whose stated aim is to promote Leeds as the UK’s alternative financial centre to London.

Clusters of expertise

So far this year Yorkshire’s M&A market has flourished, albeit in relative terms. According to Experian Corpfin, the volume and value of deals in Yorkshire increased by 7% and 354% respectively between Q4 2010 and Q1 2011. For the UK as a whole, M&A fell 9% in volume and 10% in value of deals over the same period.

There are a number of reasons underlying this success. Nigel Owens, portfolio director at YFM Equity Partners, says: ‘There are visible, well-developed clusters of expertise across the region. This makes it relatively simple to network funding that the region perceives to favour London and the South East of England.

Reliance on state funding will not be a solution on its own. According to McWhirter, many early-stage businesses in the region still have a long way to go to attract funding: ‘New businesses today need to have a credible business plan and a sensible costing model. They also should have a sound sales forecast as well as a good idea of their projected in Yorkshire, compared with other regions, which in turn facilitates the process of identifying a company and making an investment.’

Drawing on this ability to source deals, certain sectors are currently enjoying notable success. The three most prominent are engineering, manufacturing and technology. Looking first at the manufacturing and engineering sectors – last year, there were 115 such transactions in Yorkshire, with a combined value of £487m (where the deal value was disclosed). The largest of these was the £75m management buyout of
Leeds-based Allied Glass Containers.

‘There are a lot of quality engineering businesses in Yorkshire, which enjoy a good global market share and have a full order book for the forthcoming two to three years,’ says Alex McWhirter, acting chief executive of Finance Yorkshire.

‘These are very attractive businesses for investors.’ However, overall deal value was significantly down last year on previous years. Between 2006 and 2010, 575 deals in the manufacturing sector raised more than £7.7bn in the Yorkshire region, and in engineering there were 129 deals worth £2bn.

University spinouts

There are testaments to the enduring strength of Yorkshire’s engineering industry. Pressure Technologies plc, a YFM-backed business that floated on the AIM market in 2007, recently spent £5.5m expanding its operations with two bolt-on acquisitions – Hydratron and Al-Met. Yorkshire’s industrial sector also has an international reputation – in March 2010, India-based Hindustan Dorr-Oliver Ltd paid £9.5m for the engineering components firm Davy Markham.

In addition to heavy industry, the technology sector has been growing apace, driven principally by university research. Fusion IP, a Sheffield-based AIM-listed company that specialises in helping university spinouts become fully fledged businesses, assists in commercialising such projects. By the end of 2010, Fusion IP had raised a total of £22m from institutional investors and had launched 23 businesses.

In addition, last year Fusion IP invested £2m in Yorkshire-based businesses. Connect Yorkshire helps young companies turn themselves into investable prospects. The not-for-profit company has an investment remit within the £300,000-£3m bracket and has raised £44m since it was set up in 2001.

Nick Butler, CEO of Connect Yorkshire, says: ‘We have seen a lot of high-technology companies spun out of Yorkshire’s universities and research institutes. These include IT and software but also medical devices, life sciences and healthcare – for which there is an existing and growing market.’

And outside the engineering and technology sectors, there are other success stories. 3i recently acquired a minority shareholding in Go Outdoors, a Sheffield-based retailer of outdoor equipment and clothing, in a deal valued at £28m. The deal sees 3i partner with existing investor YFM.

Green investments

East Yorkshire has seen investment opportunities in renewable energy. This year, the government approved plans for one of the UK’s largest offshore wind farms, near the Humber estuary. The Humber Gateway will comprise 77 wind turbines, will generate electricity to power 150,000 households and will be built and managed by E.ON. The Green Investment Bank, which has just secured a £3bn mandate, also plans to invest in renewable energy in the Yorkshire region.

Finance Yorkshire, which was set up to redress an imbalance in funding that the region perceives to favour London and the South East of England. Reliance on state funding will not be a solution on its own. According to McWhirter, many early-stage businesses in the region still have a long way to go to attract funding: ‘New businesses today need to have a credible business plan and a sensible costing model.

‘They also should have a sound sales forecast as well as a good idea of their projected market share. But most of all, they need to recognise that a bank will want to see valid reasons why they require funding and, following the loan, they must have a plan in place in order to service the debt.’

As Yorkshire develops its technology and engineering clusters, those businesses must always have one eye on the business fundamentals that will enable them to succeed and gain access to the funding necessary for the next stage of their development, if the region is to succeed.

Lyndon Driver is a financial journalist

This article first appeared in Corporate Financier, magazine of the ICAEW Corporate Finance Faculty , in July/August 2011.