Equity investment in smaller UK businesses reached a record £8.8bn last year
Equity investment in the UK’s smaller businesses increased by 9% in 2020 to £8.8bn, the highest amount since the Beauhurst data series began in 2011, reveals the British Business Bank’s annual Small Business Equity Tracker, published today. The strong momentum continued into Q1 2021, with the total value of equity investment in smaller businesses reaching £4.5bn, by far the highest amount ever recorded in a single quarter.
Catherine Lewis La Torre, CEO, British Business Bank, said: “The UK’s small business equity finance market had a record year in 2020 with activity ramping up in the second half. This momentum continued into the first quarter of 2021 with record breaking levels of investment – a clear sign of returning investor confidence in UK smaller businesses and the country’s economic recovery.
“The Bank supported 21% of all announced UK equity deals in 2020, and as the impact of Covid-19 continues to affect businesses across the country, the work we do and our focus on investing with purpose has never been more important. Building on the UK’s position as a science superpower, we will continue to provide the world class businesses of the future with the capital they need to start up, scale up and remain anchored in the UK.”
UK deep tech investment soars
Investment in UK deep tech companies has continued to grow rapidly in the past five years, rising 291% to £2.3bn in 2020. The number of deals also increased by 78% to 440 in the same period. This is higher than the increases seen in the number of deals in the US and rest of Europe – 66% in the US and 73% in the rest of Europe.
However, when it comes to the overall value of investment, the UK still lags behind. UK deep tech companies receive substantially smaller rounds of funding than the US. The average UK deep tech company raises £24m after six rounds of funding, compared to the £113m raised by the average US deep tech company after six rounds.
US deep tech companies received almost twice the level of investment than those in the UK, even after accounting for size differences between the two economies. Between 2018 and 2020, UK deep tech companies received investment equivalent to 0.09% of UK GDP whilst US deep tech companies received investment equivalent to 0.16% of GDP.
Future Fund: Breakthrough, a new £375m UK-wide scheme due to launch this summer, will help address the later stage equity finance gap faced by innovative UK deep tech and R&D-intensive companies.
The British Business Bank effect and the Future Fund factor
The Bank supported around 21% of all announced equity deals in 2020 (13% from the Bank’s existing equity programmes and 11% from the Future Fund) compared to 10% in 2019. The increase in market coverage last year is mainly due to Future Fund activity. The report shows the overall number of equity deals in 2020 increased by 5% to 2,044, in part due to the impact and contribution of the Future Fund which is estimated to have supported 11% of the announced UK equity deals last year.
The commercialisation and growth of the UK’s science-based companies, crucial for building the future economy, is well supported by the Bank’s equity programmes. Funds supported by the British Business Bank were more likely to invest in technology and IP-based businesses than the overall equity market in 2020, with 49% of British Business Bank supported deals in this sector compared to 40% of the wider market.
Addressing regional imbalances remains core to all British Business Bank activity. As a result, Bank-supported equity deals are becoming more regionally diverse. Concentration of deals undertaken in London has reduced sharply, from 68% in 2016 to 42% in 2020.
Levels of investment vary widely by sector
The levels of investment vary widely by industry, with the UK’s thriving tech sector remaining the most attractive to investors and accounting for 46% of total equity investment in UK smaller businesses. Investment into smaller UK tech businesses increased 7% to £4bn with the number of deals rising 12%, as the sector benefitted from an increase in digitisation and remote working caused by Covid-19. Within tech, software continued to receive the largest share of deals (500 deals worth £2.5bn).
Investment into smaller businesses within the life sciences sector rose 70% to £631m. The number of deals also increased by 26% compared to 2019. However, equity investment into sectors heavily impacted by social distancing measures, such as retail, personal services and leisure and entertainment fell, with deal numbers decreasing by 13%, 17% and 10% respectively.
 Some equity deals involving Bank supported fund managers may have also used co-investment from the Future Fund or participated in a funding round led by another investor using the Future Fund.
 Due to different methodologies, Beauhurst data on tech sector investment is not directly comparable to PitchBook data on deep tech investment.