Subsea companies may face bigger challenges in upturn than downturn

By Richard Pugh, BGF

New Perspectives – theme of the 3-day Subsea Expo exhibition and conference (photo: Subsea UK)
New Perspectives – theme of the 3-day Subsea Expo exhibition and conference (photo: Subsea UK)

Richard Pugh, Investor at equity investor BGF, discusses why an upturn in the subsea sector may not be plain sailing and outlines why is it crucial to get your funding ducks in a row from the outset.

Like everyone else, we’re 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 9,000 new jobs by 2022.

That’s 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.

Thinking ahead
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 five million to 10 million, companies have to fund that growth long before they’re paid for the work. They have to buy materials and hire additional staff. Add to that cash flow problems because in many cases they’re 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’re 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.

Sensible risk level
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’m 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’s important that businesses have these funding conversations early enough, while they’re still in a position of strength, have control of their own destiny and the freedom to consider a variety of funding scenarios.

Robust, flexible foundation
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’s not for everyone. Taking on an equity partner will mean some changes, but it’s 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’d be doing is undermining our own investment.

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

Richard Pugh, investor at BGF
Richard Pugh, investor at BGF



Richard Pugh is an investor at BGF, based in the Aberdeen office. Set up in 2011, BGF has invested over GBP 2.1 billion in more than 300 companies, making it the most active investor in the UK and Ireland. This includes more than GBP 250 million invested over 30 businesses based in Scotland. A minority, non-controlling equity partner with a patient outlook on investments, BGF invests in growing businesses throughout the UK and Ireland through its network of 14 offices, including Aberdeen and Edinburgh.