What are the current equity investment trends in the UK?
Business Leader teamed up with Beauhurst to give readers an overview of equity investment trends in the UK, including regional comparisons.
Equity investment is a hugely important and popular method of growth for ambitious, private companies looking to scale. The deployment of capital into the market acts as a vote of confidence in both the recipient company and the economy as a whole: investors will only risk losing their money if there is a strong chance of making a significant return.
So in the face of macro-economic uncertainty, such as we are currently experiencing, they may well delay investment or look to other destinations to complete deals (if their thesis permits). However, this seems to not have been the case in the first half of 2019.
In the first six months of the year there has been an 18% increase in the total amount of equity investment received by the UK’s startups and scaleups, growing from £3.9bn in H2 2018 to £4.6bn. Instead of falling victim to uncertainty, this period has proved the best first half on record, putting 2019 on track to be the best year of funding yet, having already secured a higher amount than in the whole of 2016.
There has also been a 13% increase in the number of deals being completed, with the majority of the increase taking place at the seed stage – an asset class which had been experiencing a decline in activity since the beginning of 2017. It’s reassuring to see the number of seed stage deals finally return to a more normal level for this investment stage.
Growth stage companies
We’ve also seen an increase in both the number of deals and the amount invested into growth stage companies, with the average deal size at this stage of evolution climbing from £16m to £17m. This growth has been buoyed by megadeals – equity investments that are worth over £50m. These once rare, high-value capital injections, are now a permanent fixture of the funding landscape, with 14 of these deals announced over H1.
Meanwhile, at the other end of the spectrum, we’ve noticed the average deal size for earlier stage companies slightly drop. Hence, there’s an increasing chasm between the size of investments made into start-ups and those secured by scaling businesses.
Which sectors are most active when it comes to equity investment?
Many sectors secured a higher number of deals than in the previous half, including VR, Blockchain and adtech – which saw its first increase in deal numbers since H1 2016.
This half has been especially fruitful for artificial intelligence (AI), the only sector that has achieved a record number of equity deals. Despite this, the amount invested into AI companies fell to £355m, failing to reach the £439m record set in H2 2018.
The major winner of the half is, perhaps unsurprisingly, fintech. Deal numbers remained level, but when it comes to amount invested, this half has absolutely blown it out of the water. £1.7bn was invested into UK fintech companies over the past six months, surpassing the amount met in 2018 as a whole. In the UK’s high-growth scene, fintech irrefutably remains king.
Which regions are doing particularly well?
As expected, London maintains its spot as the top location for equity investment in the UK, securing 45% of deals over the half.
This position is further galvanized by playing host to 75% of the country’s high-growth fintech firms and earning a reputation as the European capital of the most well-funded start-up sector.
Outside of the capital, the East of England was one of the few regions to secure a record number of equity deals. Recipients include location mapping software what3words, who raised £1.56m at a £114m pre-money valuation, and Cambridge-based cancer screening company Inivata, who raised £39.9m to fund further research and development.
The South West region is also doing very well, with a record number of deals and amount invested in the half, in no small part down to OVO Energy’s £200m raise backed by Mitsubishi Corporation.
Where is investment coming from?
Despite ongoing political confusion, the appetite of foreign investors for ambitious British companies remains strong.
American funds are the biggest contributors to this influx of foreign investment, having completed 97 deals worth £2.5bn, and participating in half of the megadeals completed in the first six months of the year.
Perhaps investors are simply throwing caution to the wind, tiring of the uncertainty and making an effort to carry out business as usual. On the other hand, this increase in investment may be an effort to stockpile capital in order to weather the full impact of the Brexit storm ahead.
Whatever the reasons, the result is ultimately the same, increased financial support and a vote of confidence for some of the most exciting and ambitious businesses in the UK.