All About Pension-Led Funding
Pension-Led Funding Case Studies
Pension Led-Funding Case Study 5: Kit For Kids
Learning A Positive Lesson About Alternative Funding.
Entrepreneur Jan van der Velde has an infectious enthusiasm; ideal for someone whose business is supplying educational equipment to schools and nurseries. He is also quietly ambitious, although the targets themselves are far from modest.
“I want to place Kit for Kids as the leading supplier of educational equipment globally,” Jan states, without a hint of irony. Just for good measure he adds: “We also want to be the world’s leading supplier of cot mattresses.” To be fair to Jan, these are no idle boasts; they are the result of hard work, a strong business strategy and a careful approach to funding his company.
Jan started his career as an electronic engineer, designing combat aircraft systems with GEC Avionics, before deciding that financial services might offer a more sustainable future. So, he joined what was then PriceWaterhouse and qualified as a chartered accountant.
All Was Going Swimmingly Until 1993
“By then I had two kids and one of them was a right tearaway. I started to design play areas to keep them entertained and spotted a gap in the market,” Jan explains. He decided to leave the security of PW and set up his own business with some £30k in personal investment and bank funding, plus a small amount of additional support from the local Business Link.
“Our first real customer came from a referral: it was Stoke Mandeville Hospital, who were impressed with our play mats. Soon afterwards we signed Toys’R’Us at the London Toy Fair and the rest is history.” Business grew exponentially, with turnover increasing from just over £100k in the first year to £1m by year four. As turnover grew, so did the Intellectual Property value held within the company.
Despite The Obvious Demand For Kit For Kids’ Products, The Business Still Had A Major Challenge
“We were chronically underfunded from Day One,” Jan admits. “Although my accountancy background helped my credibility with the banks, I was still amazed at my own naïvety when it came to the wider issues of running a business. It’s certainly a lot more personal and you soon realise that any decision you and your team make could put you out of business overnight.”
Although the company continued to grow, the recession hit just at the time when the business needed to improve its debt to equity ratio and the banks weren’t lending. It was at that point Jan received some literature on pension-led funding. “I thought it looked interesting and met with the adviser's account manager, who was extremely professional. He gave me a clear demonstration of pension-led business funding, the potential for pension growth and the ability to re-use the fund for additional finance at a later stage if required.”
Although a risk-taking entrepreneur, Jan was still nervous about using his pension fund to finance his business. “I had just reached 45 and was beginning to think about my own mortality. But the structure was very attractive, particularly because we could use the Intellectual Property that resided in the Kit for Kids name – which by now had a 15-year reputation – as an asset that was considered quasi-capital, even by the banks.”
After an independent Intellectual Property (IP) valuation, they set up a company pension scheme based on £165k of Jan and his co-directors’ accrued pension assets and used £125k to purchase the IP on a sale and lease-back basis. “There were no personal guarantees involved, which is great news,” Jan enthuses, “no sharp intakes of breath at the end of the phone by the bank manager and it’s a joy because you’re also not borrowing from someone external, so at least it’s your own money you’re risking. I had to have confidence in my own business to invest in it, but I certainly wasn’t risking my house.”
Jan warms to this particular theme: “Over the past four years, the banks have to some extent instilled fear in business leaders which has constrained growth. If you can access funding other than through normal bank lending lines then you can concentrate on longer term strategic goals of the business rather than worrying about short term bank covenants.”
Growth Is Not Just Visible On The Kit For Kids Bottom Line, But In Its Pension Fund Too
Having partially repayed the initial loan, Jan and directors went back to the pension fund a second time for a further £60k. “It was great, because we didn’t have to go back to the bank to ask for more, we could just re-borrow some of what we’d put back into the pension fund, only this time with complete confidence in what we were doing.”
Despite the £60k re-finance, over the four years since the business agreed to use pension-led business funding, the pension scheme has grown from £165k to £210k, not including the IP that the scheme now holds. A recent IP review showed that, since the initial valuation and additional investment in the business, the company’s IP value has also risen by 28% in just four years. “That’s a pretty impressive return by anyone’s standards,” says Jan.
With a £250k contract from the Middle East freshly inked, an office in the US and eyes on the Asian market, Jan’s enthusiasm is undiminished. “In many ways, I couldn’t have done this without the pension-led funding we received between 2009 and 2012. It was the ideal solution at a time when we most needed help to give the business strength."
The Most Important Thing I Have Learnt
"This is a message for all finance directors. Consider every single scheme available and approach them with an open mind. The reality is, we need every financial weapon available in this day and age to keep our businesses growing.”
As a result of Jan’s open-minded approach, Kit for Kids has now been awarded a place on the UK government’s Growth Accelerator Scheme, run by accountants Grant Thornton, which identifies the fastest-growing private companies and helps to overcome the barriers to growth. “For us it’s been a kind of business utopia,” says Jan. “Now, we’ve not just survived the recession, we’re one of the UK’s flagship businesses for growth.”
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