Equity investment – past, present and future

The 2020 Small Business Equity Tracker report, which provides an in-depth assessment of equity finance markets for growing businesses has recently been released.

The report, which is published by the British Business Bank can be found via link. I have picked out a few of the key findings below and finish with some of my own observations.

The past – findings from 2019

• Equity finance in UK smaller companies reached record levels. Equity investment reached £8.4bn – up 24% on 2018 and over double the amount recorded in 2016. The number of deals also increased by 4% to 1,832
• London continued to dominate the UK’s equity market, but other hotspots of equity activity continue to develop, including Bristol. Interestingly Cornwall ranked 25^th in terms of deals done in 2019 – up from 50^th the prior year, reflecting the impact of Cornwall & Isles of Scilly investment fund (CIOSIF)
• The amount of finance going to venture and growth stage companies increased by 9% and 39%. However, the annual amount of investment going to seed stage companies declined for the first time, ending continuous year on year growth since 2011
• Average company valuations for growth stage companies fell 36%, reversing their long run trend upwards since 2011
• Private Equity (PE) / Venture Capital (VC) funds remain the most active type of equity investor in UK SME finance, involved in 784 deals
• Crowdfunding platforms were the next most active type of equity investor involved in 437 deals
• The number of deals involving crowdfunding platforms continues to grow, increasing by 19% compared to 2018. Crowdfunding platforms were most likely to invest in seed stage deals – with 50% of crowdfunding deals in this stage

The present

The report contains some more up to date (2020) information which is useful re Covid-19, specifically:

• The latest Q1 2020 numbers provide an early indication of declining activity
• They are likely to underestimate the full impact as the Government initiated lockdown largely occurred at the end of the quarter, when many deals were still progressing through
• In Q1 2020, there were 420 announced equity deals. This is a 15% decrease from Q4 2019, and an 8% decrease from Q1 2019
• Analysis of monthly figures suggests the impact is beginning to be felt in the market as March had the least number of deals in the whole quarter and lowest amount invested

The future

The report carries on to give an assessment of likely impact on UK SME equity finance; using the VC market period post the 2008 financial crisis as a reference point for some of its insights. Potential impacts include:

• In times of increased economic uncertainty, VC investors concentrate on their existing portfolios rather than making new investments and focus on relatively safe investments in later stage companies
• VC fundraising will also be affected by the current crisis – although “Data shows UK VC funds collectively have £9.5bn of dry powder, which potentially equates to 13 to 17 months of investment based on 2018 and 2019 VC investment levels. This may serve to mitigate any impact caused by a decline in new VC fundraising”

My thoughts

I have been an advocate of equity finance for a number of years.

I see equity, as a type of finance for companies, becoming more important over the coming months and years for a number of reasons, including:

• UK businesses already indebted looking to refinance and/ or re-gear in the period following the expiry of capital holidays on Bounce back and CBILS loans
• An increase in innovation amongst existing companies and new companies; with equity arguably being part of the right package of funds for innovation

So, I can definitely see an increased demand for equity. The supply side is where I am less clear. As noted above, VC funds are likely to have investment to deploy, but may focus initially on their existing portfolios, although market feedback is that there remains appetite for new deals. For crowdfunding and business angel activity, it may be too early to say, but I will be speaking to representatives from each of these sources over the next couple of weeks. I do see both as being key to the next stage of development of UK PLC.

I am encouraged in this respect by the comment in the report that said – “Although it is too early to assess the full impact of Covid-19 on the availability of equity finance to high growth potential businesses, the Bank will monitor market conditions very carefully and will respond as necessary to avoid damage to the long term health of the UK equity ecosystem.”

PKF Francis Clark

So far, in terms of VC/ PE houses, I have seen some looking to divest of companies and some actively looking for new acquisitions/ investment opportunities. We are currently also engaged in a number of potential equity investment assignments.

We have a great deal of experience in handling equity deals from Business Angel through the Private Equity investments and are happy to talk to prospective equity fundraisers to see where we can add value to the process.

Our Finance 2020 initiative features presentations from 3 sources of equity, including Business Growth Fund and the CIOSIF, and anyone interested in hearing their views should head for the “Debt, Equity and Rewards” section of our Finance 2020 webpage (their videos and information packs are towards the end of the section).

Any questions on the above or wider questions about equity funding, please do not hesitate to contact me or your usual point of a contact at PKF Francis Clark.