UK investment: dizzying amounts but declining deals

Improbable
improbable
Francois Badenhorst
Deputy editor
BusinessZone and UK Business Forums
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H1 2017 has seen a 74.7% increase in the total amount invested in private companies compared with the second half of last year, reaching a record £3.03bn, according to Beauhurst’s latest The Deal report.

The record amounts invested were boosted by some bumper deals, namely £389m for the video game developer Improbable and £313m for the fashion platform FarFetch. These are two of the biggest deals on record in the UK. But, as Beauhurst’s head of research Pedro Madeira notes, it still would’ve been a record amount without these deals. Average deal size is up by 64%.

It’s likely, Madeira notes, that the healthy investment totals are related to the surge of foreign investment in UK businesses. The number of deals involving non-UK funds rose 26.7% from the previous quarter. Improbable’s record round, for instance, was solely from Japan’s SoftBank Group.

“Another more recent trend is the rise of the international investor, particularly for funding the largest rounds,” says Madeira. “International appetite for UK companies, particularly from China and Japan, is stronger than ever. It is difficult to say whether this is because of or despite Brexit.”

“This gives us pause for thought about why these companies had to look so far afield for the investment they needed. In its current state, it’s debatable whether the UK investor landscape would have had the firepower to deliver these mega-deals.”

Deal numbers, however, still haven’t recovered from their slump in the second half of last year.

Deal numbers, however, still haven’t recovered from their slump in the second half of last year, increasing by only 0.6%. That is a 3.54% year-on-year decrease from the same period in 2016. Later stage companies, in particular, saw a notable decline: deal numbers have fallen 7.6% from the preceding half.

Speaking to BusinessZone, Madeira noted that there’s not an exact reason why deal numbers are stagnating - but there are two key contributing factors. Among UK investors, he says, it’s still, as he noted previously, “a flight to safety”.

“In a more confident economic environment, it's more common for people to spray and pray. But if you're in an environment where there's a lack of confidence, it’s far more cautious. The thinking is ‘I've got this company in my portfolio, I'll just add more money to it’.”

There's a decoupling between growth and super growth. Investors are focusing on the top-top band.

Interestingly, Madeira notes that it’s this uncertainty that seems to be drawing foreign investors. “Some of them could be bargain hunting because they think even though there's uncertainty, the economy is still solid and the valuations are lower than in the US,” he says.

“The people that are likely to come from abroad and invest here will have lots of capital. We're likely to be speaking of people with a lot of money. They need to find big enough bets. So with the rise in amounts and the decline in deal numbers, it's likely a combo of UK investors being cautious and foreign investors focusing on big bets.”

Referring to the sharper decline in deal numbers for later stage companies, Madeira says investors are concentrating on fewer companies. “There's a decoupling between growth and super growth. Investors are focusing on the top-top band.”

One of the few areas where there was deal number growth was in equity crowdfunding. Deal numbers from crowdfunding platforms were up 2.6% from H2 with Crowdcube and Seedrs leading the pack.

It’s not completely positive, though: within H1 2017, deal numbers on crowdfunding platforms fell by 18% from Q1 to Q2. But as Madeira explained to BusinessZone previously, any decline on crowdfunding platforms is likely a temporary respite from what has been five years of sustained growth.

Commenting on the Beauhurst’s report to BusinessZone, Crowdcube’s co-founder Luke Lang remained satisfied. “Beauhurst reports nearly £100m invested and 24% of all equity deals in the UK completed on a crowdfunding platform in 2017,” he said. “Equity crowdfunding facilitates more investment and has pioneered giving private investors access to some of Europe’s hottest companies.”

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