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Growth Capital Roundtable

Four leading players discuss the trends in the growth capital market in 2022 and their outlook for 2023. 

Stephen WeltonStephen Welton, Executive Chairman, BGF

Rhian Elston, Investment Director, Development Bank of Wales

Michelle KinnardMichelle Kinnaird, Head of Investment Entrepreneurship & Investment, Scottish Enterprise

Marcus StuttardMarcus Stuttard, Head of AIM and UK Primary Markets, London Stock Exchange Group


What have been the key trends in the market for growth capital in the past 12 months?

Stephen Welton

In terms of companies backed and the amount of capital invested and in the development of the scaleup ecosystem, it has been pretty healthy. But there is a strong parallel between the current period and the period after the global financial crash – only arguably the challenges are now greater. 

One positive difference between then and now has been the ongoing evolution and progression we have made in terms of identifying scaleups, understanding the underlying drivers for those scaleups and how they are tracked and measured. From that perspective, we’re in a healthier place – and we need to use the benefits of that knowledge and experience and progress to ensure that we’re not knocked off course. We should be doubling down on the scaleup agenda: we’ve got 30,000-plus scaleups and we must keep investing in those companies.

Rhian Elston

We have seen seed investment levels picking up. Angel activity is increasing, which is important for us as we invest with angels as well as other institutional investors. But regional disparities remain very much there; the lion’s share of investments still goes into London and the south-east and we still need to increase investment in the regions.  Welsh deals did increase in the first half of this year compared to 2021 but if you compare it with business population, Welsh deals are way down compared to London and the southeast.

Marcus Stuttard

The capital markets have slowed down this year but there has still been activity. There have been 11 IPOs on AIM and listed companies have continued to raise follow-on capital – there have been approximately 90 such transactions raising about £1.6bn. People think about IPOs as the only sort of the barometer of the health of the public markets but they are very broad and deep and genuinely provide long term finance. Over the last decade or so, approximately 70 to 80% of money raised on AIM in any given year has been by companies on the market accessing further funding rounds. Investors are still looking for growth opportunities and there is still plenty of capital out there. 

Michelle Kinnaird

Despite challenging circumstances, Scotland is so far faring well against macroeconomic

headwinds this year. 2022 has seen Scotland achieve its strongest half year equity investment results on record, with £509m invested across 216 deals. Scotland continues to be one of the most active equity investment markets in the UK.

We are all facing an uncertain and challenging period which we may not yet be seeing translating into headline figures. While large deals cause fluctuations in the size of the market, (there have been two deals above £50m transacted in Scotland this year) the underlying market (deals under £10m) grew steadily in 2021, which does give some degree of comfort with respect to the overall health and stability of the market.

There continues to be dry powder in the market with investors poised to spend and well capitalised funds across the world seeking out attractive opportunities. Scotland’s companies are as well placed as any to benefit from this.

Are you seeing particular demand or opportunities in either regions or sectors?

Stephen Welton

We need to find more effective ways of supporting the emerging and nascent industries that will define Britain in the next 20 or 30 years. One obvious sector is life sciences in which the UK is very strong but pales into insignificance in comparison with the US. It’s a sector we must scale up. 

We need to invest significantly in decarbonisation. There will be many solutions that don’t actually exist today and many of them will come from scaleups. 

There needs to be more early stage capital – as opposed to classic venture capital – to support these areas. But, because it’s very long term, there is a paucity of risk capital for this in the UK right now. 

Michelle Kinnaird

At a regional level, the central belt obviously attracts more investment than elsewhere. The East of Scotland is particularly attractive thanks to Edinburgh’s thriving and impressive financial and tech services cluster. In 2021, the East of Scotland attracted the highest number of deals and investment in Scotland, accounting for almost half of total deal value. 

The West of Scotland accounted for one quarter of total investment in 2021. Glasgow, as a key hub in the burgeoning space industry and with a growing life sciences cluster, is attractive to investors. There are increasing opportunities outwith the central belt. The South of Scotland saw a single investment of £164m into Borderlink, the largest deal of the year so far in Scotland. Aberdeen is home to companies leading in Scotland’s transition to becoming a low carbon economy and saw a boost in investment in 2022 due to a £50m deal into Well-Safe Solutions. The Highlands and Islands has strengths in food and drink and a growing life science cluster in Inverness.

What significant steps have been taken in the past 12 months to address the gap in the provision of growth capital?

Marcus Stuttard

Our role at London Stock Exchange is as a convenor; we want to make sure that the whole of the funding continuum is as well connected as possible, eradicating technical, infrastructure and regulatory barriers wherever possible. We want to make it more efficient for capital seekers to connect with capital providers. Our investment in Floww is an important part in trying to join up the funding ecosystem, as it has a really interesting platform to bring companies and investors together. 

Rhian Elston

Our role has always been on the smaller side of growth capital, with an average deal size being around £1m to £2m. But we are keen to co-invest and that has been really positive in recent years. External investment is coming in from outside of Wales to share the risk; that’s coming from institutional capital but we are also seeing a fair amount of corporate investors as well. We have definitely seen our co-investment numbers increase over the past 12 months.

Given the broader state of the UK and global economy, the danger is that institutional co-investors will be more focused on their own portfolio. To date, we have only seen this caution reflected in the high street banks who are certainly tightening their risk appetite. Of course, that might open up more opportunities for growth capital investment – where companies who would have previously turned to bank funding for growth start to look elsewhere and consider equity finance. 

Michelle Kinnaird

There exists a persistent and systemic gap in the provision of growth capital at the earliest stage of the market – typically, deals below £10m but most acute at the lower end where there is greater risk and less commercial traction.

The increased importance that has been afforded by Scottish Government to entrepreneurship and companies with high growth potential in the recently launched National Strategy for Economic Transformation (NSET) is a step forward in tackling this issue and supports co-ordinated action. This 10-year economic strategy seeks to stimulate entrepreneurship and achieve a step change in the percentage of Scottish startups and existing mid-sized businesses that grow to scale. The appointment of Mark Logan, former COO of Skyscanner, as Scotland’s first Chief Entrepreneur is intended to ensure entrepreneurship is embedded in the economy and prioritise and strengthen partnerships with industry and investors.

Another key initiative over the past 12 months is the Scottish Government’s Tech Scalers programme. Codebase, one of UK’s largest tech incubators and located in Edinburgh has a £42m contract to develop a network of tech scaler hubs, as recommended in the Scottish Technology Ecosystem Review. This is one of the largest investments by the Scottish Government into Scotland’s potential as an entrepreneurial nation.  

What progress has been made on the release of institutional capital and what more needs to be done?

Marcus Stuttard

A number of things need to happen. In 1999, 73% of UK pension funds were allocated to equities; by 2018 that had dropped to 12%. We have large pension funds with a lot of capital but not enough of it is being allocated to equity finance and the next generation of high growth businesses. 

Stephen Welton

In one way, my optimism is undimmed because the capital is there – but for many years we haven’t really deployed the investment capability of the pension funds into long term investments. In the aftermath of the near implosion of defined benefit pension schemes caused by the use of LDI schemes,a school of thought has emerged that pension funds should be even more tightly regulated. But what this episode reflects is that risk can’t be eliminated and the focus must be on driving returns. Pension funds need to completely rethink their investment strategy and increase their allocation towards equities. 

Michelle Kinnaird

Scotland is among the top regions for attracting investment in the UK. However, the continued dominance of the Golden Triangle, particularly London as a global investment hub, is increasing and unlikely to change given proximity to investors and the market. We have an opportunity to benefit from London’s status as a global investment hub, as set out in the Scottish Government’s Global Capital Investment Plan, to engage with London-based investors and to continue to showcase the quality of Scottish investment opportunities. 

2021/22 was Scottish Enterprise’s strongest year on record for attracting international co-investment with more than half of the finance leveraged coming from global venture capital firms and corporate investors. This was helped by our ongoing work to build investor networks internationally, complementing the work of Scotland’s Global Investment Plan.

From your perspective, are you seeing a greater knowledge and take up of equity funding among scaleup businesses? What more could be done for connecting and educating scaleups to the most appropriate forms of growth capital?

Marcus Stuttard

Aurrigo which joined AIM this year, is a very good example of a connected ecosystem. It received early stage backing from Innovate UK; we were introduced to the company through the Innovate UK EDGE Scale Up Programme; it came to market with a couple of cornerstone VCT investors. It’s a very good example of connectivity between government support, fiscal incentives and an ecosystem that works together.  

The task of education will never end; there will always be the next generation of founders and business owners who need to learn more and to hear from people who have been through the process. Convening those conversations will remain an important role for many stakeholders including London Stock Exchange. 

Rhian Elston

In the area of pure growth capital, there is still more work to be done on helping businesses to understand the opportunities that are there if they take on growth capital. Many businesses remain nervous around giving up a degree of ownership. There’s definitely a lack of knowledge and plenty of misunderstanding. 

Last year we ran a big campaign trying to raise the awareness of equity investment for businesses. We’re minority investors but we still hear concerns about giving a part of their business to an institution and what that means. A lot of our work is around building trust with businesses and educating them on what it means to have us as an investor.

For a company that has initially taken a loan from us, and who has a named individual within the Development Bank working with them, it’s a lot easier for them to then accept equity investment offers because they know us. And we are often the stepping stone to other private investors as well. Once a company has got comfortable with the principle of equity finance and can understand the benefits, they are keener to accept it. 

We find the better way to get the equity message through is via peer to peer networks and through case studies of companies. 

We take a dual track approach: the other route is through the advisory network where we need to keep on educating and informing, particularly those smaller accountancy firms who might be looking after fantastic businesses with great growth prospects but who themselves don’t have a corporate finance department. 

Michelle Kinnaird

This is an ongoing challenge but the situation is improving, we must continue to target ambitious entrepreneurs and those from under-served groups. Sharing experiences and increasing the visibility of equity-backed scaling companies does help to build this momentum and awareness amongst aspiring early-stage companies.

Our evidence consistently points to the important contribution that non-financial support, alongside co-investment, makes to addressing challenges at the pre-seed, startup, growth and expansion stages. We have a team of Financial Readiness specialists who work with growth companies to help them to prepare and raise equity finance; in 2021/22 they supported 269 high growth companies to raise growth capital, which we hope to increase. 

ESG credentials and the net zero agenda have become a central focus in new investments and businesses as well. Are you allocating more weight to ESG considerations?

Marcus Stuttard

It remains a key priority for investors. People are not just looking at climate-related Net Zero targets but also at energy security as a result of the invasion of Ukraine. The focus will continue and grow stronger. 

Rhian Elston

By our very nature, we are a social investor so with our history we have probably been stronger in the social and governance areas. So while we have KPIs about our investments and commercial returns, we also measure the social impact benefits as well. This is something that comes naturally to us.

We are making efforts to understand how we can support our companies on their environmental progress. With our equity investments, we are supporting them on ESG within their value creation plans. 

But as much as we are putting more weight on ESG, we see our role as helping to steer companies on this journey but not to use the funding or the criteria to preclude businesses from investment. In our part of the market we are trying to support businesses that can’t access finance from the private sector so if you put too many barriers in their way they will definitely get left behind. 

Michelle Kinnaird

Aligning decision making with our overall approach to net zero and ESG principles is at the forefront of our ambition to be a values-based investor. We are taking this further still to include diversity and our regional agenda. The market is moving at pace in favour of investments that put ESG considerations at the forefront of decision making, and there is growing evidence that financial performance is directly linked to and affected by ESG factors. 

Our ESG focus will influence the private investors we work with, how we prioritise our investments and the due diligence that we undertake on our deals. For example, we no longer invest in companies that work against our Net Zero agenda such as oil & gas companies, unless there’s a net zero transition element. 

Our ESG and net zero agenda will also influence what we measure and what success looks like for us. It will mean exploring the quality of jobs created, who is taking up these new employment opportunities and the positive influence of our investments on our target to reach net zero by 2045.

Will it be harder or easier for scaleups to raise growth finance in 2023 – and why?

Stephen Welton

Whether it’s debt or equity, capital is going to be more expensive. Rising interest rates mean that debt will be more expensive; equity will be more expensive because the risk premium has gone up. 

Marcus Stuttard

There has been a lot of uncertainty this year which has caused both investors and companies to hit the pause button. But the UK continues to have the companies, the capital and the ideas; these are underlying strengths which we need to promote, realistically but with confidence. 

The headlines are – understandably – dominated by uncertainty but plenty of positive things are happening: the importance of scaling companies is being highlighted and recognised; we have got a comprehensive and well calibrated set of tax reliefs. And if you take AIM as something of a proxy, London remains the largest growth market in Europe by a significant margin both by the number of transactions and capital raised. So we are achieving real successes but nothing should be taken for granted and there’s a lot more work to be done.

Rhian Elston

We are lucky in Wales. The Development Bank is well capitalised and next year the British Business Bank will launch its £130m regional fund for Wales – and there will be more sources of capital. Coupled with private sector investors looking for opportunities outside of London, I think availability of growth capital will be strong in Wales. If we can get companies past the barrier of accepting equity finance, there will be the funds there for them.

Michelle Kinnaird

The market dynamics are changing. It will be much more difficult for our ambitious early-stage companies to raise investment due to macroeconomic concerns and impending recession. This may lead to significantly more caution and nervous market sentiment, a shift in the balance of power in favour of investors, increased complexity in the deals, downward pressure on valuations and more demand for bridging rounds to get to a next larger fund raise.  The increased cost of borrowing to fuel their scaling journey presents a further challenge.

Companies will likely face more challenges and require stronger business cases and paths to profitability to attract funding over the next few quarters. This is why Scotland’s supportive ecosystem and initiatives like NSET and Tech Scalers are so important.

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