VCM0042

Written evidence submitted by British Business Bank

 

  1. The British Business Bank (the Bank) is a Government-owned economic development bank. Our aim is to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by supporting access to finance for smaller businesses.

 

  1. We published our eighth annual Small Business Equity Tracker 2022[1] on 22 June 2022, examining trends in equity investment into UK SMEs. This supplementary evidence is provided further to our full submission of 14 June 2022, to provide the latest data from the new report.

 

The current state of the venture capital industry in the United Kingdom, including opportunities and threats, such as the availability of domestic capital to allow firms to scale up in the UK

 

  1. 2021 was an exceptional year for UK equity finance with investment reaching £18.1bn, nearly double its 2020 level. Strong growth continued in Q1 2022 with £7.6bn invested, the largest quarterly amount recorded, despite emerging economic headwinds. Whilst the growth stage grew the most, 2021 saw record levels of activity across all three company stages, which benefitted the overall equity ecosystem.

 

  1. There were 2,616 announced equity deals in 2021, which is a 17% increase on 2020. This also confirms more companies are raising funding than previously. 2021 was characterised by larger deal sizes and higher valuations compared to 2020, as increased competition for deals led to more founder-friendly terms.

Talent

  1. For every £1 of equity investment in the UK in 2021, all-female founder teams received 2p, all-male founder teams received 84p, and mixed-gender teams 14p. This is lower than the 4% received by all-female teams in 2020, reflecting yearly volatility.

Overseas investment

  1. Overseas equity investors make an important contribution to UK VC. The involvement of overseas investors in the UK market has increased over time, with 29% of all equity deals in 2021 involving an overseas investor, the highest proportion on record. Deals involving domestic investors only also increased in 2021, but at a lower rate than deals involving overseas investors.

 

  1. As with deal numbers, the amount raised from deals involving overseas investor has increased every year since 2011. £13.5 bn was invested in deals involving overseas investors in 2021, a 118% increase on 2020. Since 2017, more than 50% of the annual investment value has come from deals involving overseas investors, with this proportion reaching a record 75% in 2021. Investment from deals involving domestic investors only has also increased since 2017 but at a much slower rate, 58% compared to 243%. The investment value of deals involving domestic investors only also reached a record high in 2021 with £4.6bn of investment. This suggests that although the domestic equity investor base has strengthened in recent years, the increased participation from overseas investors has played a large role in the large growth seen in equity investment in the UK over the last few years.

 

  1. Overseas investors have the largest role at the later stages of financing, where 45% of deals at the growth stage involved an overseas investor. As overseas investors continue to open offices within the UK, they are becoming increasingly active at earlier stages. Overseas investors were involved in 62% more deals at the seed stage in 2021 compared to 2020.

 

  1. The later stage investment market experiences both benefits and risks relating to this high proportion of overseas investors. While this additional capital in the UK equity ecosystem does help support the growth of domestic companies, it is vital that we continue to strengthen the UK market for venture growth funds. By bringing more venture growth funds to market, ambitious growth-stage founders have a diverse source of patient capital when global markets may be less buoyant.

 

  1. Additionally, there are concerns that the high proportion of overseas investors may lead to UK companies exiting overseas. Between 2011 and 2021, 64% of companies that had received overseas funding were acquired by an overseas company. This compared to 42% of companies that received funding from only domestic investors. A similar picture emerges when analysing IPO location. Between 2012 and 2021, 26% of UK companies that listed did so on an overseas exchange. This proportion increases to 44% if they had received any overseas investment. Only 15% of companies that had only received investment from domestic investors listed on an overseas exchange. If IPOs and acquisitions are combined, then 44% of all exited companies exited overseas. This increases to 61%, for companies that previously received overseas investment at the equity funding stage. In comparison, only 40% of exits were overseas for companies that received funding from domestic investors only. Whilst this analysis does not prove causality, it does suggest that companies funded by overseas investors are more likely to exit overseas.

 

  1. Nonetheless, a distinction should be drawn between overseas investment into domestic companies and overseas funds investing into domestic funds. 56% of Limited Partner (LP) commitments by value into UK VC funds raised between 2017 and 2021 came from overseas investors, including the European Investment Fund (EIF). Government contributed around 25% of the capital to UK VC funds, which suggests the remaining 19% of capital came from private UK investors including pension funds, high net worth individuals and corporate investors. Despite increases in UK VC funding over time, UK VC funds are reliant on overseas sources of capital.

 

 

 

 

  1. The Bank’s equity programmes supported around 14% of all announced equity deals between 2019 and 2021, with the Bank’s share of supported deals increasing from 6% in 2011 to 18% in 2021. Bank-supported funds were more likely to undertake deals in venture stage companies compared to the overall market.

Levelling up

  1. The Bank’s Midlands Engine Investment Fund and Northern Powerhouse Investment Fund contributed to 17% and 12% of equity deals in the Midlands and North respectively in 2020. Both these percentages are lower than previously reported reflecting fewer programme deals identified, but also higher numbers of overall market deals which is a positive development, as these local ecosystems become more established.

 

June 2022

2

 

[1] Small Business Equity Tracker 2022 https://www.british-business-bank.co.uk/small-business-equity-tracker-2022/