11
not having the dynamic management
structure, contacts or sufficient
working capital to take advantage of
the potential benefits of diversifying
into other lucrative areas which make
use of similar tools and expertise: Such
opportunities can offer attractive profit
margins to those with the capabilities
to take advantage of them, with the top
companies, including Cyrus RW Group
Ltd, recording a gross profit margin
of well over 40% in the last tax year
(although the average is just under 30%)
1
.
Acquisition and/or aggregation of
sector SME’s under an integrated
management structure offers a number
of potential benefits, including the
funds and expertise to operate a single
professional marketing, IT, HR and FD
provision across the companies at a
lower overall cost. This is significant
because most family run, single
Precision Engineering companies are
unable to efficiently run these important
functions due to time and cost
implications. Additionally, independent
management from outside the family is
likely to remove the concern of future
potential customers, investors and
buyers, who may harbour concerns
about the company being a “lifestyle”
business, which is owned and run
by engineers who are in their 60s or
70s, rather than a robust , long term
proposition.
In terms of retaining value, the asset
class benefits from being a partial
tangible asset – where investments
are generally based on the value of
machinery and premises (which can be
significant) with a small premium paid
for goodwill and the underlying shares.
Unlike a money market instrument,
machinery will not disappear overnight
and suddenly lose its entire value
(although value can be eroded with
new, upgraded versions).
POLITICAL SUPPORT AND
GOODWILL
In view of the historical importance of
engineering in the UK and the fact that
engineering sectors contributed an
estimated £117.8 billion in tax revenues
“...an upward trajectory for investment will enable the UK to reap the economic and societal
rewards of its strength in science and engineering, driving UK innovation and creating skilled
and valued jobs”
18
Naomi Weir, Director of the Campaign for Science and Engineering
institutions of supporting them, both
with specific initiatives and within other
wider schemes, is well-established and
broadly agreed upon.
Moreover, the backing is not entirely
financially motivated, but is also driven
by a desire to improve and refine
technology. This support comes in
various forms and from various entities,
as shown in the next page.
The importance of Precision Engineering
as a part of UK engineering and
manufacturing as a whole also
engenders a feel good factor to those
who want to invest.
This is not just for their own benefit, as
they are helping a traditional and vital
UK industry, but with the possibility of
saving and/or growing potentially viable
companies that would otherwise be lost,
with the prospect of damaging effects
on the companies they supply.
INVESTMENT HORIZON
For large, corporate investors in the
Precision Engineering Sector, their
aim is to acquire new knowledge with
which to grow new projects, products
and even sectors, and to enhance their
own business model, with long term
objectives. However, for the individual
investor, in spite of current growth
forecasts for many of the sectors which
drive business in Precision Engineering,
investing in it is certainly more of a
short term proposition: Private equity
typically targets an exit in three to four
years.
19
This way, some of the risks such
as changes in market conditions can be
better mitigated.
In terms of the investment level,
diversification is the key to a balanced
portfolio and the investment case
here is for a short term commitment
to a relatively small, niche market
which is closely correlated to wider
economic markets and factors, but
also with potential for substantial
gains. Consequently a small allocation
is justifiable and it might form part of
a diverse satellite portfolio of EIS, VCT
and other investments into unquoted
companies.
to the Exchequer in the 2013/14 tax
year, representing 24% of total HMRC
receipts over that period
8
, along with the
level of employment provided in those
sectors – 5.6 million people, or 18.2% of
total employment in the UK in 2014
8
, the
policy of successive governments and
£117.8 billion
TAX REVENUES
(2013/2014)
5.6 million
PEOPLE EMPLOYED
(2014)
18.2%
TOTAL
EMPLOYMENT
TOTAL HMRC
RECEIPTS
24%
CONTRIBUTION IN THE UK
