The Interview: Tim Hames

As Director General of the British Private Equity & Venture Capital Association (BVCA), Tim Hames has a perfect view of how the funds industry is performing, where money is being raised, and the role of the Channel Islands. He talked to BL about transformative technology, Brexit and the future of the industry 

How did you get to where you are now?

By accident! Trade bodies are very strange – they vary between industry insiders who understand the industry backwards, and industry outsiders who have the alleged value that they understand the outside world better. I’m very much in the second camp.

My first career was as an academic. I taught American Politics at Oxford University, when that was a respectable thing to do. I then became a journalist, working at The Times from 1996 to 2008. After I left, I worked as a special adviser to the Speaker of the House of Commons, before coming to the BVCA in 2010, initially to handle public affairs and communications. In 2013, I became Director General.

In a nutshell, what does the BVCA do?

It has an outward-facing and an inward-facing function. The outward-facing function is to be the representative and advocate of the industry to politicians, officials and regulators, the media, and any other interested parties. The internal function has been to encourage greater networking between limited partners (LPs), general partners (GPs), entrepreneurs and aspiring entrepreneurs. Then there’s the advisory committee, who either work with LPs, GPs or entrepreneurs, or a combination of all three.

Recent BVCA research on venture capital (VC) shows that returns are at their highest in 13 years. Is there a reason for that?

VC went through a pretty miserable decade between 2002 and 2012 in the UK – the aftermath of the dotcom boom and bust, 9/11 and then the financial crisis.

Things were pretty grim, to be honest. In 2012, something like £320 million was invested by UK VC. That seems an impressive number, but that year it was less than the combined wage bills of Manchester United and Manchester City! This year will probably see something closer to between £2bn and £3bn being invested.

There are a number of reasons for that. The industry had to change focus and create more specialist investment strategies. There’s a greater appetite among potential investors who see there are some truly transformative technologies out there that can enable you to go from a very small business at start-up to a very big business in a short period of time. Not every business is going to do that, but there’s utterly transformational tech around. 

And finally, there have been some very high-profile successes or exits. The proof of the pudding is what price you get on exit, and there have been some impressive examples of this – Skyscanner is just one of them.

Do you see that continuing?

I think the most important element in ensuring whether this does continue is transformative tech. Valuations in the US for the tech sector are higher, and there’s the risk of a tech boom, so they’ve been willing to put their money into UK and European tech because it seems like relatively good value. As long as the vision for transformative tech is actually realised, then there’s reason to think we’re at the beginning of a decent run for VC.

Private equity (PE) also seems to be in rude health. Why’s that?

If your metric is fundraising, PE’s in astonishingly rude health. This year, Preqin’s early data suggests there could be a record year, exceeding 2006/07 in terms of money raised. If your metric is pricing, then things are a bit nervous as pricing is quite high. And that accounts for a slight cooling in activity as people say to themselves: ‘Take care how much you pay for what’. 

But there’s a lot of money in the industry and that’s partly because of a strong record of returns in the past decade. In a world where there’s no such thing as a safe bet, private equity is seen as a more tried-and-tested bet than others. The acid test now is how money is spent over the next five years.

And there’s a lot of dry powder waiting to be spent – figures suggest in the region of $1trn. What does that say to you?

It’s going to require institutions to be pretty dexterous as to how they spend it. I suspect that means they’ll spend money in different sectors to those they invested in historically, because certain sectors are very crowded and some less so. They might be much more willing to look at less fashionable geographies in terms of where investee companies are located. 

I also think they’ll be more willing to do that if, for instance, the tech is interesting enough – to invest perhaps at an earlier stage in a business’s life than they might otherwise have done historically. If they don’t do that, then everyone ends up chasing the same assets and you end up paying higher prices.

Do you think there will be a natural transition from VC to PE?

The ball is moving up the pitch at faster speed. The notion of VC investing in early stage businesses and then at some point turning to private equity firms would have been pretty rare a few years ago. But I think that’s going to be one of the big distinguishing features of the next two to three years. 

And not only between VC and PE. Within VC there’ll be a flow between early-stage people and those who come in later – in PE, between lower mid-market and large buyouts. I think there’s going to be a huge blurring as people position themselves in order to gain the most advantage out of transformative technological change. 

Let’s talk about Brexit. What’s your take on it? And how do you think it will affect your industry?

I think we’ve reached a point where we can no longer keep saying: ‘We don’t know’. Brexit clearly isn’t stopping people raising money, even for institutions and funds that have a history of only spending money in the UK. There’s no evidence that there’s any kind of investors’ strike because of Brexit. 

That’s the good news. Where the Brexit effect does take place is what and where you choose to put that money into – clearly, unless pricing adjusts quite radically downwards, you’d be more nervous about investing in the sorts of businesses where components fly backwards and forwards across national boundaries with the risk of exposure to tariffs. You’d be more nervous about businesses that historically have had a large proportion of non-UK/EU labour – like much of the hospitality sector in the UK. So, until things become more settled, it has an influence over investment choices. 

That said, Brexit-sensitive businesses should be worth less at the moment than Brexit-insensitive businesses, but I’m not sure that’s always the case.

Any positives you can see?

You have to slightly look over the horizon for the positives. If the UK were in a position to be much more flexible in future free-trade deals with big blocs such as the US, China, India and so forth – because it’s on its own and not part of a cumbersome group of 28 that are all negotiating – that could give it first-mover advantage. 

If Brexit’s handled sensitively and intelligently – two big ifs – the UK could get something out of it. But that depends on the UK post-Brexit looking at its tax and regulatory structures and saying: ‘We inherited a lot of these from our EU period, do we really need them and want them to look like this?’ And on it being more go-getting in terms of looking for business outside Europe and North America.

The BVCA has a Channel Islands Working Group – what’s the purpose of that and how do you work with them?

We set it up about four years ago for a number of reasons. The Channel Islands are absolutely fundamental in the broader ecosystem of the industry. I strongly felt there was a huge amount of talent in the advisory community across Jersey and Guernsey that the BVCA didn’t have the institutional means of tapping.

We meet about four times a year, but there’s exchange of information all the time around issues to do with tax, regulation, the state of the industry, new ideas on how things could be structured; and I think it’s proved to be a pretty good set-up. 

And as an outsider, I find it amusing to stimulate rather more cooperation between Jersey and Guernsey than might have naturally occurred.

Like the industry at large, funds in the Channel Islands look rather healthy. What would you say are the islands’ strengths and weaknesses?

The strengths are largely obvious. It’s the sheer pool of expertise; it’s the deep roots; it’s the English language; it’s the confidence in the ability of institutions and the operation of law. In an era in which the whole offshore world is under the spotlight, there’s a strong sense that Jersey and Guernsey aren’t the same as Cayman or the BVIs. So, I think there are an awful lot of reasons to feel confident. 

However, the islands aren’t part of the EU, and Luxembourg is trying to make the most of that. But it doesn’t have the same history. For now, it doesn’t have the same quality of ‘squad’. People aren’t as institutionally familiar and comfortable with it as they are with Jersey and Guernsey. 

There’s been a lot of consolidation in Channel Island businesses, with the finger pointed at the regulatory burden. What’s your view on that?

There’s an element of truth in that, but you do tend to find that these things go in waves. People will spin off from big firms and do their own thing. I think that’s a very natural process. If institutions get too big, there are too many people looking for promotion and opportunities at the same time, so the logical thing to do is jump and get your own niche. It’s part of the ebb and flow and there will be new entrants unquestionably. 

It’s said that there’s a lack of qualified funds staff in the islands. Why do you think that is?

If there’s a single factor that artificially restrains the sector over the next five to 10 years, it’s the ability to hire the sort of people you want as quickly as you want, in the numbers that you want.

If some of the fundraising figures for 2017 turn out to be correct, you’re talking about a huge increase in five years in the amount of money being raised. You can’t just whistle up a set of experienced advisers at that sort of notice, there has to be a pipeline of people coming through.

So, the more enlightened you can be about encouraging people with the appropriate skill sets to make a commitment, the better off you’ll be in the longer term.

Finally, how do you see things playing out in VC and PE in the next 24 months?

I think fundraising will continue to be pretty strong. Whether it peaks this year or next is difficult to say, but the short-term fundraising outlook is quite impressive. In order to position themselves to spend that money in a sensible fashion, institutions need to go through quite a lot of reinvention.

They’ll be looking at their business model and asking why they’ve never done deals in certain places; why they’ve not looked at X as a place in which to find investor money; why they’ve never backed a business younger than five years old, and so on. Firms will need to cast the net wider than they have done historically. Do they have the right people to do that? 

You’re seeing a lot of very big funds deliberately raising smaller funds on the side in the earlier stage and more tech-focused investments. I think that’s going to be a distinct pattern. The age of the one-size-fits-all approach to funds is rapidly disappearing.