The changing landscape for equity finance in the UK Dan van der Schans Econom ist @britishbbank Market Analysis Team www.british-business-bank.co.uk
I ntroduction 1. Recent trends in SME equity markets 2. Key challenges 3. Overview of British Business Bank Equity Programmes Data sources: • Beauhurst provides information on UK equity deals by VC, angel networks, crowdfunding, Government funds, etc. • Pitchbook and Preqin @britishbbank 2 www.british-business-bank.co.uk
Recent trends in SME equity finance m arkets @britishbbank 3 www.british-business-bank.co.uk
UK has a relatively high am ount of equity finance com pared to other countries but lags behind the US • Recovery from 2009 financial crisis • US equity to GDP ratio is nearly twice as high as UK (0.44% compared to 0.23% in 2015) @britishbbank Pitchbook 4 www.british-business-bank.co.uk
Equity m arket declined in 2 0 1 6 follow ing strong grow th over previous 5 years • 1,148 Equity deals (£3.4bn) in 2016 18% ↓ in deal numbers and 4% ↓ in investment amount • compared to 2015 @britishbbank 5 www.british-business-bank.co.uk
I nvestm ent peaked in Q3 2 0 1 5 , and num ber of deals declined throughout 2 0 1 6 • Wider economic uncertainty with slow down in other VC markets in 2015-2016: – Europe: 19% ↓ in deals (25% ↓ by value) – US: 19% ↓ in deals (10% ↓ by value) @britishbbank 6 www.british-business-bank.co.uk
Business stages… Beauhurst I nvest BVCA Broad Description Classification Europe Seed Seed Seed Young companies being setup or been operating for a short time, but have not yet made any commercial sales. Start-up Start-up Other Early stage Companies that has been around for a Venture few years and is in the process of gaining Later Later Stage Venture significant market traction. Sales are stage growing rapidly but unlikely to be venture profitable. Grow th More established companies that has been around for at least 5 years. Likely to have multiple offices or branches with substantial revenue streams (some of them may be profitable). Expansion or ‘Growth Growth Capital’ @britishbbank 7 www.british-business-bank.co.uk
Differences exist by business stage, w ith seed stage funding increasing in 2 0 1 6 despite low er deal num bers Seed stage : Investment ↑ by 44% but 9% ↓ in deals compared to • 2015 Venture stage : 28% ↓ by value and 26% ↓ by number • Grow th stage : stable with 1% ↓ by value, but 22% ↓ in number of • deals @britishbbank 8 www.british-business-bank.co.uk
I m proved funding environm ent over the last few years for early stage com panies Seed stage deals formed 39% of all deals in 2011 but ↑ to 50% • in 2016 • Increase also seen in funding amounts going to seed • ECF , Angel Co-Fund and tax based schemes (EIS and SEIS) have all contributed to funding environment @britishbbank 9 www.british-business-bank.co.uk
I ncrease in equity deal sizes in recent years Average deal size £3.7m in 2016, ↑ from £3.2m in 2015 • • 39% of deals (with disclosed investment amounts) are below £500k • 10 largest equity deals in 2016 formed 23% of total investment The number of deals up to £499k and £500k-£999k both ↓ by 27% • compared to 2015 Number of deals greater than £10m ↑ by 18% in 2016 • @britishbbank 10 www.british-business-bank.co.uk
Private Equity ( including VC) is m ost active type of investor in 2 0 1 6 • Decline in deal numbers in 2016 seen across most investor types After rapid growth between 2011-2015, crowdfunding deals ↓ by • 18% in 2016 @britishbbank 11 www.british-business-bank.co.uk
I ncreasing im portance of crow dfunding in SME equity m arkets • Crowdfunding involved in 25% of all deals in 2016 (34% of seed deals) • Crowdfunding involved in the highest number of seed stage deals in 2016 (192) compared to 132 for PE/ VC funds @britishbbank 12 www.british-business-bank.co.uk
Technology/ I P based sector received the m ost deals and investm ents in 2 0 1 6 • There were 440 Technology/ IP based deals in 2016, receiving £1.7bn of funding • Technology forms 38% by number and 49% by value of total market • Software forms the largest technology sub sector followed by life sciences @britishbbank Based on weighted counts 13 www.british-business-bank.co.uk
Three Challenges 1. Regional disparities 2. Finance for scale-up companies 3. Financial returns and exits @britishbbank 14 www.british-business-bank.co.uk
Challenge 1 : Regional disparities in equity finance • London received the greatest amount of funding (56% by value, 47% by deals) in 2016 • High growth businesses spread throughout the UK @britishbbank 15 www.british-business-bank.co.uk
London’s concentration is even greater if Governm ent funds are excluded • Lower fund manager presence in areas outside of London: Number of unique equity investors per region (excluding VC listed as one VC as primary government investors) investment type investment type London 531 305 SE 42 26 EE 34 25 33 22 Scotland NW 27 15 WM 18 11 EM 9 8 NE 8 4 8 6 Northern Ireland SW 8 4 Y&H 7 4 Wales 2 2 647 391 Grand Total @britishbbank Pitchbook 16 www.british-business-bank.co.uk
Dem and side issues are also im portant Awareness of different sources of finance by area • Lower awareness of VC and business angels in areas outside of London, but crowdfunding more spread out @britishbbank BBB SME Finance Survey 17 www.british-business-bank.co.uk
There are clusters of deal activity in 2 0 1 6 … Glasgow Edinburgh Manchester Newcastle Birmingham Cambridge Oxford Cardiff Bristol @britishbbank 18 www.british-business-bank.co.uk
BBB program m es • £400 million Northern Pow erhouse I nvestm ent Fund ( NPI F) . Launched in Feb 2017 to help SMEs in North West, Yorkshire & the Humber and Tees Valley to access funding. • £250m Midlands Engine I nvestm ent Fund ( MEI F) announced in March 2016 budget. @britishbbank 19 www.british-business-bank.co.uk
Challenge 2 : Later stage equity finance Firm s w ith subsequent funding Average VC deal size by area rounds $US m, 2013-2015 transactions % after Seed/ Series A, 2008-10 cohort UK 100% = 228, US 100% = 2,724 $29.8 68 B 62 $22.3 $20.4 43 C 32 23 D 9 E 10 3 $4.2 $3.6 $3.0 F 3 0 G 1 Early Stage Later Stage 0 Europe UK US @britishbbank 20 Source: Preqin www.british-business-bank.co.uk
Challenge 3 : Financial returns from investing in VC are poor com pared to PE and public m arkets IRR (% p.a) 10 years Private Equity Total 1 3 .2 Venture Capital 5 .1 pre-2002 vintage funds -0.3 2002 vintage funds onwards 7 .9 Small MBO 23.5 Medium MBO 16.0 Large MBO 12.9 Selected comparators FTSE All Share 5.6 Total Pension Fund Assets 6.2 BVCA data is net of costs, fees and charges. Returns from com parators are gross returns ( so over estim ate potential returns to investors) . Source: BVCA PE and VC Performance @britishbbank Measurement Survey 2015 21 www.british-business-bank.co.uk
Sub-optim al investm ent cycle @britishbbank 22 www.british-business-bank.co.uk
BBB program m es • £400m of funding announced at 2016 Autumn Statement to expand VC Catalyst program m e to focus on later stage VC. • Delivered by BBB’s commercial arm (BBBI) to invest in fund managers with track record and leverage in private sector investment to support the UK’s venture capital ecosystem. @britishbbank 23 www.british-business-bank.co.uk
Main Findings 1. Equity deals increased over 2011 to 2015 but declined in 2016 across all main types of investor (including crowdfunding) as part of a wider market slowdown. 2. Equity remains concentrated in London, despite high growth businesses being located throughout the UK. This is due to both supply and demand side issues, but clusters of deal activity are forming in areas outside of London. 3. In recent years, there has been improvements in the availability of funding for early stage companies, but there is now a later stage funding gap affecting scale up companies. 4. Financial returns from investing in VC need to increase in order to be attractive to institutional investors, to create a long term sustainable model. @britishbbank 24 www.british-business-bank.co.uk
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