A record £6.7bn in equity investment went to small UK businesses in 2018 as foreign investors continued to make long-term bets on British companies.
The British Business Bank’s annual Small Business Equity Tracker report showed that there was a 5 per cent annual increase in equity investment last year, driven by regions outside London, although the capital still attracted £6 out of every £10 in funding.
The report, which looks at crowdfunding, angel investing and public and private sector funds, found that equity investment outside London increased by 29 per cent to hit £2.8bn in 2019. There were fewer deals in 2018 than 2017 but the average size increased 11 per cent to £4.5m.
Alice Hu Wagner, managing director for strategy at BBB, said she expected the growth to continue. “The UK has improved a lot. The ecosystem is maturing and the venture capital investors have more experience,” she said.
Ms Wagner added that most investors were from overseas and saw Britain as better value than the US. “There have also been some big successful exits so they know they can make returns,” she said.
The BBB, a state-owned wholesale lender, was set up after the financial crisis to boost the flow of long-term capital to small businesses after lending to them collapsed in the wake of the 2008-09 financial crisis recession.
Equity investment, which has a five-year or more timeframe, is often more appropriate for growing businesses — especially in the tech sector, because it allows them to concentrate on growth rather than repaying debt.
Many venture capital firms are establishing offices in provincial cities to better source investment opportunities, according to Ms Wagner. Edinburgh, Cambridge, Cardiff, Manchester, Glasgow and Bristol were among the 15 local authority areas with the most deals; the rest were in London.
London’s figures fluctuate annually because they are based on a few “megadeals” that can be worth hundreds of millions of pounds each.
The BBB runs some investment funds and cofunds others. It estimates it supported around 9 per cent of all equity deals in UK SMEs between 2016 and 2018, accounting for around 13 per cent of overall equity investment.
The government has allocated up to £2.5bn in extra funding for the bank to help businesses through Brexit. Last year it launched British Patient Capital, a fund to invest the money, with a particular focus on companies that are seeking the next stage of their growth after the start-up period.
Entrepreneurs have been critical of the UK’s ability to take fast-growing companies to the next stage of development, which has led to many being sold to overseas rivals. British Patient Capital seeks to provide long term financing through its investment in venture capital funds, which give companies options other than a sale.
To date, the fund has made 31 investments across the venture capital sector, backing 200 tech-focused companies, according to Catherine Lewis La Torre, chief executive of BBB. She said that the UK was already ahead of the rest of the EU as a tech hub. The fund wants its investments to play to the UK’s strengths, with an emphasis on areas such as AI, quantum computing and robotics.
Business leaders are concerned about the future of the British start-up industry in the event of a hard Brexit. On Monday, Theresa May told London Tech Week, a series of tech-themed events held in the capital, that she commissioned a study of UK tech competitiveness, aiming to “make sure Britain stays the best place in Europe to launch and grow a start-up”. This could include setting up a new hub, or series of hubs, for international investors and UK businesses.
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