Business

UK family office wants to co-invest with other family offices in convertible loan opportunities

A family office run by David Toplas, a UK entrepreneur, is seeking family offices prepared to co-invest in venture capital opportunities by subscribing for convertible loan notes. 

He believes his funding package can free founders from having to give away equity on generous terms as a result of a succession of funding rounds.

Instead, they set aside cash to service the debt over three years, after which the lenders would have the option to convert the debt to equity, or request repayment of their capital.

It’s quite challenging for companies to make the transition from angel investments to finding professional investors who negotiate their preferred rates and impose financial muscle on the deal

Toplas’ family office is the David Toplas Settlement Trust, the ultimate owner of Mill Group, best known as a residential company, recently involved in a financial restructuring.

Toplas is best known for providing private sector finance for public sector projects in the 1990s in partnership with institutions such as Aviva, the UK insurer.

The deals, known as the private finance initiative (PFI) kept costs off the public sector balance sheets, thus encouraging the public sector to wheel out a succession of projects. Ventures taken on by Toplas involved schools, hospitals and libraries.  

The public sector ended up agreeing to pay some hefty bills, pushed higher by changes in specification, and PFIs passed out of use.  In 2013, however, the Audit Commission concluded that most PFI projects led to savings. Toplas says PFI brought discipline to construction, and saved the public sector from administrative headaches.

After PFI, Toplas got involved in residential property opportunities, and finding ways for private investors to back social housing. He also backed 40 growth companies. One of the most successful is Vesta, chaired by top investment banker Bob Wigley, whose platform facilitates the sale and purchase of rented residential property.

Another venture, Aeristech, is developing lightweight electric motors. SyndicateRoom offers a tax-efficient platform for startups. Toplas says his internal rate of return from startups is an annualised 27% over 15 years.

He has now turned his attention to later-stage ventures in need of further funding. He says: “It’s quite challenging for companies to make the transition from angel investments to finding professional investors who negotiate their preferred rates and impose financial muscle on the deal.”

Research in the Journal of Financial Economics by a team led by Will Gornall in 2020 found that the founders of US growth companies often suffer severe equity dilution, as a result of agreeing late-stage funding deals with hard-nosed venture capitalists. 

After analysing a sample of unicorns, Gornall said they were 5% to 188% overvalued before taking into account of dilution. Founders often took it on the chin when the companies were sold and late-stage investors exercised their preferential rights.

Ventures which get through to an IPO often end up with a market capitalisation lower than the value implied by their final funding price. Silicon Valley Bank has warned against dilution: “Easy money is the most expensive money you’ll take.” 

SVB has been proactive in lending money to US ventures. But smaller ventures often find it hard to access bank debt. 

Saturn Investors, the co-investing vehicle created by Toplas wants to offer them funding via convertible loan stock on a coupon of 6-8% over three years. The loan can be extended for a further two years on a coupon of 8-10%.  The terms are modelled on convertible terms offered by the British Business Bank owned by the UK Government.

In putting together its deals, Saturn can also supply equity finance and acquire stock from disillusioned shareholders, after carrying out due diligence.

It would target ventures worth £20 million-plus with a sensible governance structure that has been operating for five years.

Toplas developed the convertible structure with Richard Thomas, who once structured deals for property developers Robert and Vincent Tchenguiz and a property company called Trilium, now owned by the UK-based Pears family.

Thomas says: “This kind of deal offers an equity-style risk, but it is underpinned by a debt-style contract where repayment is one of the options.” 

The borrowers may lack credit quality, but they would be determined to keep their company going, to the potential benefit of Saturn’s convertible, which also brings discipline to the way a company is managed through terms of engagement.

Thomas conceded the debt coupon may look a bit expensive and the convertible could offer lenders the option to subscribe for stock at a 20% discount. “But that’s super cheap for existing shareholders if a $30 million company has become a $150 million company and you’ve hung onto your equity.”            

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