Digital economy boom as UK companies raise a record £1.4 billion of growth capital in 2015

Growth capital raised by emerging companies in the UK reached a record £1.4 billion in 2015 compared to £1.2 billion in 2014. This is according to the latest “UK Growth Capital” report produced by Kingston Smith. The number of transactions for 2015 increased by 25% to 360 from 289 recorded in 2014. Over the past three years, growth capital raised has increased by almost 60% from £889 million in 2012 to £1.4 billion in 2015.

Jonathan Garbett, Corporate Finance Director at Kingston Smith comments, “Overall, 2015 saw on-line and technology dominating more traditional sectors, a reflection of the opportunities being created as a result of rapid rates of innovation, disruption and growth in the digital economy. The biggest sub-sector was on-line business-to-business services, making up 18% of the total number of transactions. Also prominent were consumer app providers, technology which includes software and digital services, and Fintech. Niche manufacturing also accounted for significant activity.

“Q1 was the most active quarter with £405 million raised in 99 transactions. We believe there was a particular focus on completing transactions in this quarter ahead of the UK General Election and the 2015 Finance Act. Q2, Q3 and Q4 were broadly similar in levels of activity.”

Strong supply of investment opportunities and funds

The two key factors responsible for the boom include the numerous investment opportunities, followed by a strong supply of investment funds.

Garbett comments, “Looking at the numerous investment opportunities, the UK is a leader in development and adoption of on-line business models. High profile success stories include ASOS (clothing retail), Skyscanner (travel), Zopa (peer-to-peer lending), (consumer lending) and Purplebricks (residential property agency). The UK is perceived to be a world leader in e-commerce with the right regulatory environment and a strong position in Europe. It has a front-row seat when it comes to leading in entrepreneurialism in the off-line world, with disruption and innovation being seen on a regular basis on the part of developing businesses.

“Regarding the supply of funds, the UK is home to some of the most active growth capital funds in the world, with global leaders Accel Partners and Index Ventures establishing significant London-based teams and home grown funds and managers such as Business Growth Fund, Balderton, Octopus, Foresight, Calculus, Yorkshire Fund Managers, Northern Venture Managers, Albion and Mobeus establishing themselves over the last twenty years.”

Debt funding

While we believe the senior debt funding market remains conservative when it comes to funding high growth earlier stage businesses, mezzanine funding – debt with a higher risk profile and higher interest charges – is increasingly available where there is some cash flow available to service part of the interest charge.

Growth Capital statistics

2012 2013 2014 2015
Value of institutional transactions (£million) 601 617 741 890
Value of non institutional transactions (£million) 288 371 417 547
Total value of transactions (£million) 889 988 1,158 1,437
Institutional transactions (number) 149 144 177 190
Non institutional transactions (number) 85 90 112 170
Total number of transactions 234 234 289 360

Source: Zephyr database of M&A transactions, published by Bureau Van Dijk – £1m-£15m minority stake fund raises by UK based companies (information as at 14 January 2016)

Sources of funding

During 2015, institutional funding accounted for the majority of investment activity, with individual investors including crowd-funding accounting for the rest.

Institutions and professional managers of funds have come to the fore in this type of investment activity over the last twenty years. The Venture Capital Trust and Enterprise Investment Scheme tax breaks for UK residents have been one factor. The growth and success of the venture capital model has been another, with UK institutions such as Balderton establishing a strong track record backing very high growth companies and US institutions such as Accel Partners and Index Ventures establishing London bases.  We have seen an increasing number of mid-market private equity firms completing minority stake transactions as competition in the buy-out market increases.

Individuals continue to provide very substantial amounts of growth capital funding. This includes club deals involving significant numbers of investors and funding from one or a small number of very high net worth individual(s).

Garbett concludes, “Against this background we expect that 2016 will be similar in levels of activity to 2015. CEOs and founding shareholders of growing businesses based in the UK are in a very strong position to attract growth capital funding on compelling terms.”