The changing landscape for equity finance in the UK Dan van der - - PowerPoint PPT Presentation

www.british-business-bank.co.uk @britishbbank

The changing landscape for equity finance in the UK

Dan van der Schans Econom ist Market Analysis Team

www.british-business-bank.co.uk @britishbbank

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

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Recent trends in SME equity finance m arkets

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UK has a relatively high am ount of equity finance com pared to other countries but lags behind the US

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• 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)

Pitchbook

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Equity m arket declined in 2 0 1 6 follow ing strong grow th

• ver previous 5 years
• 1,148 Equity deals (£3.4bn) in 2016
• 18% ↓ in deal numbers and 4% ↓ in investment amount

compared to 2015

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I nvestm ent peaked in Q3 2 0 1 5 , and num ber of deals declined throughout 2 0 1 6

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• 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)

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Business stages…

Beauhurst Classification I nvest Europe BVCA Broad Description Seed Seed Seed Start-up Young companies being setup or been

• perating for a short time, but have not

yet made any commercial sales. Venture Start-up Other Early stage Companies that has been around for a few years and is in the process of gaining significant market traction. Sales are growing rapidly but unlikely to be profitable. Later stage venture Later Stage Venture 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). Growth Expansion or ‘Growth Capital’

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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

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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

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I ncrease in equity deal sizes in recent years

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• 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

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Private Equity ( including VC) is m ost active type of investor in 2 0 1 6

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• Decline in deal numbers in 2016 seen across most investor types
• After rapid growth between 2011-2015, crowdfunding deals ↓ by

18% in 2016

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I ncreasing im portance of crow dfunding in SME equity m arkets

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• 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

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Technology/ I P based sector received the m ost deals and investm ents in 2 0 1 6

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• There were 440 Technology/ IP based deals in 2016, receiving £1.7bn
• f funding
• Technology forms 38% by number and 49% by value of total market
• Software forms the largest technology sub sector followed by life

sciences

Based on weighted counts

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Three Challenges

1. Regional disparities 2. Finance for scale-up companies 3. Financial returns and exits

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Challenge 1 : Regional disparities in equity finance

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• London received the greatest amount of funding (56% by value, 47%

by deals) in 2016

• High growth businesses spread throughout the UK

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London’s concentration is even greater if Governm ent funds are excluded

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• Lower fund manager presence

in areas outside of London:

Number of unique equity investors per region (excluding government investors) VC listed as one investment type VC as primary investment type London 531 305 SE 42 26 EE 34 25 Scotland 33 22 NW 27 15 WM 18 11 EM 9 8 NE 8 4 Northern Ireland 8 6 SW 8 4 Y&H 7 4 Wales 2 2 Grand Total 647 391

Pitchbook

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Dem and side issues are also im portant

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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

BBB SME Finance Survey

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There are clusters of deal activity in 2 0 1 6 …

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Manchester Cambridge Bristol Glasgow Edinburgh Oxford Cardiff Birmingham Newcastle

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BBB program m es

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• £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.

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Challenge 2 : Later stage equity finance

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Average VC deal size by area

$US m, 2013-2015 transactions

Later Stage Early Stage US UK Europe

Firm s w ith subsequent funding rounds

% after Seed/ Series A, 2008-10 cohort UK 100% = 228, US 100% = 2,724

Source: Preqin

G F E D C B 1 3 10 23 43 68

$22.3 $3.0 $20.4 $3.6 $29.8 $4.2

62 32 9 3

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Challenge 3 : Financial returns from investing in VC are poor com pared to PE and public m arkets

21 Source: BVCA PE and VC Performance Measurement Survey 2015

BVCA data is net of costs, fees and charges. Returns from com parators are gross returns ( so over estim ate potential returns to investors) .

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

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Sub-optim al investm ent cycle

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BBB program m es

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• £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.

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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.

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is authorised and regulated by the FCA. British Business Finance Ltd (registration number 09091928), British Business Bank Investments Ltd (registration number 09091930) and British Business Financial Services Ltd (registration number 09174621) are wholly owned subsidiaries of British Business Bank plc. These companies are all registered in England and Wales, with their registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. They are not authorised or regulated by the PRA or FCA. Capital for Enterprise Fund Managers Limited is a wholly owned subsidiary of British Business Bank plc, registered in England and Wales, registration number 06826072, registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. It is authorised and regulated by the FCA (FRN: 496977). British Business Bank plc and its subsidiary entities are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found at www.british-business-bank.co.uk.

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