Business Angel Blog

On to something topical – it is very difficult at the moment to raise money. The [tag]credit crunch[/tag] is biting in and it is real. Having said that, the Fund I am running is set up to take advantage of this crunch in terms of buying distressed businesses – although more about that in a later blog.

This brings me on to my first request. I have been asked to [tag]explain the credit crunch[/tag]. Please do give me feedback on what you think of this as an explanation….

With historically low interest rates and low unemployment levels in the US for the last couple of years, companies sprang up everywhere offering mortgages to people who normally not be considered credit-worthy. This sector is what we called the Sub-prime sector.

In many cases people who had come out of prison and had no jobs (or at least no way of proving their income!) were being offered mortgages. You may ask why? To be honest it is not such a crazy idea if the underlying asset you are lending against is going up all the time. And that is exactly what these new companies were banking on (pardon the pun).

So these sub-prime companies were lending money to credit risky clients at special low introductory rates on the back of a property that should be increasing in value. The clients loved it as it gave them a foot on the property ladder and the first couple of years payments looked cheaper than renting, and if they did struggle to pay it back in a couple of years – they could sell the property which would have gone up in value and all would be well……..

All good up to now. However, these sub-prime companies got another fantastic idea to make more money! What if they could persuade someone else to buy this debt from them – raise more money off the back of that and then carry on lending more? (they made money from the number of deals they did not the quality of the deals they did).

Just as the interest rate we get charged when we look to borrow is determined by our credit rating provided by companies like Experian; www.experian.com , financial institutions look to companies like Standard & Poor to provide a credit rating for financial products. These companies rated these sub-prime mortgages as AAA (the highest rating) – because of the way they were bundled and sold. So Banks like Citigroup and UBS could not get enough of these assets – as they were deemed to be very low risk (AAA rated) and yet offered a higher rate of return. The fundamental driver in finance is to chase higher level of returns for a similar level of risk.

Sadly, the property market did not carry on going up and interest rates did not stay low! With this combination many of the clients who held the mortgages simply defaulted. And they defaulted in their thousands! Suddenly these assets that these banks were holding as AAA rated were, well lets just say not so AAA rated (in fact they were worthless). So banks were now sitting on a much weaker balance sheet than they had said they were – hence the need for them to raise more money.

[tag]Northern Rock[/tag] did not have exposure to the subprime market in a big way but was the UK’s largest casualty of these events. Northern Rock used to sell Mortgages – and once they had sold a mortgage they would go to the wholesale money markets and get other banks to lend the money they needed to fund these mortgages. They would make a very healthy profit because they were borrowing cheaper than they were lending and all was going well. LIBOR (which is the interest rate banks charge each other to lend and borrow money was more or less the same as the base rate). Banks were very happy lending to each other huge amounts on a daily basis. However when doubts about the quality of banks balance sheets started emerging, banks became nervous about lending to each other as they entertained the thought that they might not get paid back!

As this happened LIBOR became significantly higher than the base rate. Northern Rock which had a low deposit base was particularly affected by the sudden increase in the cost they would have to pay to borrow money and issued a profit warning.

And then suddenly the whole thing jammed up when banks refused to lend money to each other. It really was like musical chairs – with Northern Rock left without a chair after the music had stopped! They had to go to the Bank of England – and the rest is history…

I have been thinking about writing a blog for sometime, but finally got round to it when I was persuaded by a close colleague that some people might find it useful to read through my experiences and my thoughts on the business issues that I have to deal with.

So who am I? My name is Permjot Valia and I have been an active investor and supporter of start up businesses for the last four years. I have seen over 200 business plans in that time and have invested in 16 different businesses. Some of the investments have failed (four) and some are doing well, with the jury out on the others. Because of my experiences (good and bad), I am often asked to talk to start ups about how they should write a business plan and pitch to investors like me. I am also very keen on supporting start ups and Entrepreneurs.

What has been very interesting for me to watch is the growth in interest in programs like Dragon’s Den and The Apprentice. Whilst without a doubt it has increased the levels of interest there are out there in commerce, it creates in my view a much distorted view of business. Whilst the Sir Alan Sugar school of business has its place, I think it is terribly outdated and it is what he is – a relic of the 1980s. Today, more so than ever business is about collaboration, working in teams across the world and making a difference to the customer. Yes Sir Alan is a lot more successful (in terms of money he has made) than I will probably ever be – but that should not be the only yardstick that you measure a great business person on (or am I wrong – should it?). Just remember 12 years ago, Amstrad was worth more than Apple is and now something like 80% of his wealth is in property. (The last apprentice winner Simon was after all that given a job as an estate agent!)

Sorry, my point is that I want to speak up for that other way of doing business and share stories with my readers about things I have learnt and am learning from the great and the good about how to do business. I should add that I would also say that I have a very good contact book and like doing business with people who really know their stuff. Certain people have a high profile because they pay people like Max Clifford to make sure they are in the Sunday Times Rich List (most smart people pay accountants to make sure they are not in the List!) or that they appear on crappy TV programs like ‘Secret Millionaire’ – “poverty tourism” as the Guardian described it. They have a profile which is not merited on the basis of what they have achieved.

Others have high profiles because they are bloody good at what they do and they have had numerous successes. I would like to think that the people I work with are in this category and are not only high profile but really nice as well.

I hope through the course of this blog I can introduce you to some of these people along with new business concepts, routes to market as well as give an insight into the sometimes elusive world of start-up business and early stage investment.