Scale up funding outlook still favourable despite challenges

Columnists | Financial Services | Technology

The economic climate remains uncertain for Britain’s business community, which makes fundraising for growth more challenging for small to mid-sized companies.

Concerns over GDP growth, dislocation in the equity and bond markets and fears around Brexit have all complicated the UK’s financial landscape. However, there remain many sources of capital available to innovative growth companies if they know where to look.

Regional growth funds are helping small and mid-cap firms raise equity and debt, while alternative Peer2Peer lenders, venture capitalist and private equity houses have significant reserves of dry powder ready to deploy. Meanwhile, despite a restrained performance at the end of last year, AIM remains a resilient source of capital.

At finnCap we work with a broad range of these institutions to supply the funding for expansion companies seeking to scale up require and the insight we draw from these relationships informs our view of the changing fundraising landscape outlined below.

Funding landscape suffering from economic uncertainty

There are clearly concerns around financing growth businesses in the current climate. Partly this is related to Brexit and fears around European Investment Bank (EIB) funding. Estimates suggest the EIB has limited deals to UK based groups by more than two-thirds since the 2016 Brexit referendum, Where once the UK was the number one destination for EU venture funding – the single largest source of early stage capital on the Continent – it has now been overtaken by France, Germany, Italy and the Netherlands.

Meanwhile banks which, following the 2008 financial crisis have scaled back their lending to small and mid-cap businesses, are a continuing source of concern. SMEs makeup 99% of private businesses in the UK and account for more than half of all turnover and employment, yet lending to small businesses last year remained static, with the £7bn of new loans drawn in the third quarter of 2018 compared with £7.1bn in the previous quarter, according to the most recent data from UK Finance.

And then there are the turbulent equities markets. The FTSE 100 lost 12.5% last year suffering its worst year since the financial crisis in 2008. Almost all of which came in the final quarter of the year. Similarly, AIM, having outperformed the main market for the first three quarters of last year, also suffered losses in the final quarter.

Alternative sources of capital continue to fill the gap left by banks

Despite this less than favourable backdrop, companies searching for scale-up capital do have a far greater range of options. The funding landscape today is far broader than a decade ago with an array of capital raising opportunities for companies to consider.

Private equity and venture firms have substantial funds to invest. For example, VC investment in UK SMEs was £5.96bn over the course of 2018, which was more than 1.5 times the level invested in fast-growth businesses in Germany. Private equity houses invested some £3.2bn in UK SMEs in the first half of last year, which was up 12 per cent year-on-year and the trend stayed strong over the second half of the year.

The alternative lending industry, which includes challenger banks, private debt and Peer2Peer lenders, which emerged in the immediate aftermath of the financial crisis – in no small part due to the unwillingness of the banks to lend to SMEs – has matured over the past decade. P2P leader Funding Circle, for example, recently reported a 55% increase in annual revenue taking loans under management to £3.1bn.

Regional funds such as the Northern Powerhouse and Midlands Engine have also been established, offering a mix of equity and debt solutions, with the former providing SMEs with £31m of funding in its first year.

AIM remains Europe’s top destination for fast-growing firms looking to go public

Moreover despite the volatility of the last quarter of 2018. AIM remains Europe’s top market for fast-growing firms looking to go public. Last year it was responsible for 59% of the funding secured by growth companies across European bourses, raising £5.5bn across 398 separate deals.

This compares well with £17.7bn for the entire main market in London. In fact, AIM has performed well in the face of Brexit uncertainty. There were 42 IPOs on AIM in 2018 raising £1.6bn for growth companies, compared with 49 IPOs a year earlier raising £2.1bn – itself a 97% increase on the money raise in 2016. Moreover, after 23 years AIM has evolved from being the unpredictable relative of the main market into a one that is focused not simply on early investment opportunities but on more established companies, offering a better balance of risk overall for investors.

Scale-up funding outlook still favourable

finnCap Group plc itself provides corporate finance, private fundraising, debt advisory and trading services to 125 public and private growth companies, to help them find the right investment for growth and access capital. Since it was established in 2007, finnCap has helped raise more than £2.6bn of new capital to support corporate clients.

finnCap Group plc’s debut last December demonstrates our confidence in AIM as a source of growth and scale-up capital for companies. Investors continue to be attracted to businesses that offer significant returns compared with the main market, while also enjoying some deserved tax advantages for the risks taken. AIM also remains the first choice to raise capital for a broad range of companies from across the economy, with the sheer diversity of its constituents a key strength.

The wide range of alternatives and continuing attraction of AIM should be a salient reminder that scale-up capital is still available and Britain, regardless of the numerous headwinds it faces, as always, remains open for business.

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