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Q&A

The funding bonanza

Sunday, 19 August 2018 20:27 PM | FINANCE

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Sam Smith is the only female Chief Executive of a City broking firm. She established finnCap in 2007 having orchestrated the buy-out of a small broking subsidiary of a private client stockbroking firm. Today, finnCap is ranked as the number one Nominated Adviser and Broker to AIM companies. Sam describes the changing investor landscape for private company fundraising, and what this means for scaling businesses:

Is there more money being invested in growing businesses, and at which stage of growth?

Investment in venture-stage firms increased significantly in 2017. This is a trend that will continue, partly thanks to the Chancellor's welcome decision to double the limit on EIS investment, both in terms of the limits of how much investors can invest (from £1 million to £2 million p.a.) and company limits of how much EIS investment they can receive (from £5 million to £10 million p.a. combined EIS/VCT).

What has driven this boom in tax efficient investment, and will it be sustained?

Last year’s Autumn budget focused on helping entrepreneurial knowledge-intensive companies, offering a direct response to the UK’s 'scaleup' challenge - specifically that there have not been sufficient funds for Series A and B investments into these companies going from first revenues to scaleup and growth.

Recent changes to VCT rules will result in further growth in tax-driven funds, all seeking great investment opportunities in the private capital landscape. In 2016, there was an 18 per cent increase on the previous year in capital deployed in EIS/VCT mandates in 2016: this is not a one-off, but a trend.

What other investment trends are you seeing at later stages of scale?

When it comes to the growth stage, we’ve also seen more £50m+ ‘megadeals’ than ever before in the private capital space, with appetite from institutional investors such as Fidelity and Woodford Investment Management showing no sign of slowing. According to Beauhurst research, 29 ‘megadeals’ of £50m+ were seen in 2017—four times as many as in 2016. In 2011, there were 173 institutional investors deploying capital in private deals; in 2017, it was a record 315 institutions. This bodes well for the future of the UK’s scaleup ecosystem, and for the economy as a whole.

Do you expect to see more private and institutional investment in scaleups, and why?

The key factor driving increased private capital investments has been record low-interest rates globally over the past decade. This has encouraged both private and institutional investors to look further afield for yield, moving into private investment opportunities where they previously would have looked only at public stocks. The dollar amount of VC money invested over the past decade reached new heights in 2017 (with $148 billion invested globally), and since 2008 there has been a 37 per cent y-o-y increase in PE investment.

The increased intersection and coalescence of major economies mean that private capital will be raised and deployed cross-border: over 40 per cent of capital raised by European private equity in 2017 came from investors outside of Europe, while a third of investments made into companies were cross-border. Neither PE and VC as asset classes show any signs of slowing down and continue to enjoy immense success on the fundraising trail, which could drive valuations higher.

What does this all mean for scaleups looking at funding to accelerate growth?

This is very good news for today’s scaling businesses because there is plenty of funding available. VCs and PE houses are sitting on a lot of dry powder, looking for great SMEs in which to invest. The pool of capital available to scaling private businesses has deepened significantly; VC and PE are no longer the de facto choice for high-growth companies seeking funding. The question now is not so much about making sure that you have access to enough capital, but rather that you have access to the right kind of capital which is best suited to your equity story.

Sam Smith will join a panel of members at our next Speaker Boutique on Funding Strategies to Scale on 13th September 2018.