Small businesses in the UK attracted a record amount of equity during the pandemic as tech-focused companies prospered and others were helped by a government Covid emergency fundraising scheme.
Equity investment in smaller UK businesses reached a record £8.8bn last year — an increase of 9 per cent — and continued into the first three months of 2021 when a further £4.5bn was raised. This was the highest amount ever recorded in a single quarter, according to a report by the state-owned British Business Bank (BBB).
The figures highlight the bifurcation in Britain’s small-business economy. Thousands of small companies struggled during the lockdown, forced to close or unable to trade fully in sectors such as hospitality, retailing and travel.
But others in ecommerce and digital services benefited as demand for their services increased, with the majority of the population forced to stay at home. These attracted record levels of cash from investors sitting on large pools of unspent funds. Nearly half of total equity investment into UK smaller businesses was in the tech sector, according to the BBB.
The government’s Covid Future Fund scheme also helped boost equity raising by matching private sector funding using convertible loan notes. More than 1,100 companies used the scheme to raise £1.1bn.
Stripping out the activity of the Future Fund, which accounted for about a tenth of typically smaller equity raisings, the volume of deals would have declined slightly but the value would still have risen last year, the report said.
The BBB, which oversaw the Future Fund scheme, supported about a fifth of the UK equity deals announced in 2020. The research was carried out by the data provider Beauhurst.
Catherine Lewis La Torre, the BBB’s chief executive, said sums raised were a “clear sign of returning investor confidence in UK smaller businesses and the country’s economic recovery”.
Many of the loan notes issued by the Future Fund are now converting into shares. Le Torre said that the BBB was setting out options for the Treasury about how to manage those equity stakes in future.
The BBB is overseeing the launch of a second Future Fund scheme which will invest £375m in so-called ‘deep tech’ and R&D-intensive companies.
Investment in deep tech — which refers to areas outside consumer services such as life sciences, renewable energy and AI — has grown significantly in the past five years, rising 291 per cent to £2.3bn.
The research also showed greater regional diversity in the spread of the investments: London-based companies’ share of deals reduced sharply, from 68 per cent in 2016 to 42 per cent in 2020.
The activities of the BBB, an economic development bank that also oversaw the Treasury’s various emergency coronavirus loan schemes, have come under scrutiny as part of the Greensill Capital scandal. The bank approved the supply-chain finance company, which collapsed earlier this year, to hand out loans under one of the government-guaranteed programmes.
The BBB is carrying out an investigation into how Greensill became an accredited lender under the Coronavirus Large Business Interruption Loan Scheme. Le Torre declined to comment on the probe.
The government’s Covid emergency schemes are all closed to new lending, although the BBB has overseen the launch of a new ‘recovery’ loan scheme that offers a partial state guarantee for bank lending to businesses.
This scheme has been criticised for allowing interest rates of up to 15 per cent and the need for personal guarantees. Bankers have said take-up has been very low so far. La Torre agreed that lending under the scheme was at “low levels” but said that it reflected that the private lending market was returning to normality.