Duke Royalty, the AIM-listed finance fund, is sitting on £45m of cash it wants to invest in established small businesses.

Duke, which to date has closed a dozen deals, raised £17.5m in additional equity in October, having fully deployed most of the £95m it originally raised.

The fund uses a concept called “royalty finance” that invests in SMEs against future cash flow. Basically, royalty finance acts like a business mortgage. One attraction for a small business owner’s point of view is that it is a way of raising long-term finance without having to dilute equity.

Although Duke Royalty aims to back around six businesses each year, its most recent deals have been extending existing facilities to two customers: investing £1.4m in communications systems provider Welltel Ireland and putting another £250,000 into Step Investments, owner of cinema advertising firm Pearl & Dean.

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The obstacle for Duke is finding SMEs that fit its investment criteria: ideally, it is looking for SMEs which have been running for at least eight years and have turnover of anything between £2m and £10m.

Neil Johnson, CEO of Duke Royalty, said: “Unfortunately, we’re not in control of all aspects of a deployment. Our owner/operators see their businesses as their children. And when you’re dealing with founders giving up equity – we’re trying to help finance a management buyout right now — it becomes even more complicated.

“Each deal is different. That’s why we try and have lots of deals going on so at any one time.

“We’ve come from a standing start doing 12 different deals in a dozen different ways. In the UK there’s a £2.5bn funding gap as banks have withdrawn lending to small businesses. That’s billions being taken out of the system, so there’s a lot to play for.”

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Announcing its results for the six months to September 30 2019, Duke Royalty announced that it has more than doubled revenue to £5.9m compared with £2.7m year on year. Net profit before tax rose from £1.1m in H1 2018 to £3.7m .

Unlike debt, which is keen to be repaid in full within a relatively short time period, Duke says that it doesn’t want its capital back – ideally, it wants to grow its annual return over time, as how much Duke earns depends on how the company performs. Duke shares in both the upside and downside over the life of an investment.

Johnson said: “We give company owners the ability to maintain control of their company by not diluting equity and, as opposed to debt, there’s no repayment risk to face.”

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