By  Callum Laing is a serial entrepreneur and CEO of MBH Corporation plc.

With the focus on fast-growing tech firms, investors are missing the true value within the SME market, says Callum Laing. Here he explains why we need a new business model for the benefit of both sides.

 Over the past few years we have witnessed an entrepreneurial revolution, with the number of small businesses reaching record levels. In the UK for example, there are now almost 6 million SMEs which between them account for around half of private sector turnover and two-thirds of all jobs.

As big corporates downsize their teams and outsource services, SMEs are likely to play an even bigger role in the economy in the future. Yet while many of these businesses will need funding for growth, ordinary investors have little opportunity to tap into their potential.

Investing in small businesses is considered high-risk for most. Usually it is left to the likes of venture capitalists or business angels who operate in the strange new world of start-ups, where young tech geeks with quirky domain names aim to build digital unicorns. However this is not where most of the value is being created.

The real value in the SME market lies in the part that is largely overlooked – the ‘unsexy’ companies in sectors like construction, engineering, healthcare and education. They don’t do blockchain, crypto or cannabis oil but they do deliver many of our day to day services. These are good, well run businesses that understand their customers’ needs, deliver great value and turn out profits year after year.

Companies like these may know how to turn a profit and could give investors good returns, but they still struggle to find funding and often lack the capital to take on new customers. While small firms create half the world’s GDP, the finance world hasn’t found a way to profit from them directly. The average small business is just too illiquid and too risky for investors to get involved in.

From an outsider’s point of view this may seem strange – it certainly did to me when I went into investment after years running my own businesses. I came to realise it reflects a deeper structural problem in the world of finance.

Several years ago I started to look for a way to reconnect investors with small businesses in a way that minimises risk and maximises liquidity. Working with colleagues, we developed the Agglomeration model, which we put into practice with the launch of MBH Corporation plc (MBH) in 2018.

So why is it different and how does it create value? MBH acts as a holding company for multiple small businesses– a type of collective IPO. We take on only debt-free, profitable businesses which have typically been established for around 20 years. All are carefully selected and subject to strict due diligence.

Business owners exchange their shares for shares in MBH and can continue to continue to run them in the way they see fit. Being part of a listed company helps to levels the playing field with their big competitors and makes it easier to win bigger contracts and grow.

Each time a company joins the group, it increases earnings per share and, because private companies are valued below public market rates, each acquisition creates an immediate uplift in value.

Agglomeration is different to other equity investment models. As we have a decentralised approach, we are not looking merge them all into one brand, and we are not forced to sell companies after a certain time to return funds to investors. We have a ‘buy and hold’ model.

MBH Corporation now has 10 small businesses and we are planning to add a similar number in the next 12 months or so. We aim to continue creating shareholder value through the consistent and accretive acquisition of excellent companies.

During the Covid-19 our businesses have really felt the benefits of being part of a bigger group and as the world emerges from the lockdown, they will be better placed to move forwards.

According to a report by the OECD, SMEs will be at the centre of the next production revolution, as digital technologies level the playing field in terms of access to markets. If this is the case, we need new and more creative models to support them, help them to access funding and build resilience, and allow investors to tap into their potential. Agglomeration could offer a new way forward for SMEs in the post-Covid world.