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Scotland's risk capital market

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Scotland's risk capital market

Deep dive into the latest reports show that Scotland's investment performance remains strong - and is one of the most active equity investment markets outside London, SE and E England.

Patient capital investment demands patient data analysis 

When Scotland’s risk capital market hit £538 million in 2017, was that the right time to call a market peak?

Alarm bells may have been ringing in some quarters when we published our 2018 results that pointed to a market total of £316 million; that’s despite four consecutive years of a £300 million plus market. 

Our benchmarking analysis demonstrates that Scotland is one of the most active equity investment markets outside the golden triangle (London, SE and E England).

In 2018, Scotland again had the next highest number of deals (253), followed by the North West of England (188) and South West of England (180). 

Due to the UK distribution of a few very large deals beyond the golden triangle, the corresponding amounts of investment tell an altogether different story, promoting the South West (£408 million), the North West (£348 million) and the West Midlands (£338 million) ahead of Scotland.  

A year-on-year investment drop of 40% for Scotland offers up a powerful headline, especially when the UK investment market fell by only 5% over the corresponding period.  

Scotland's growing risk investment market

However, you don’t have to dig too deep if you want to discover the true health of Scotland’s risk investment market, for there you will find a market that, contrary to such a powerful headline, is one that is continuing to grow.   

To help us to put these headline numbers to one side, we can do no better than to start with a quote from Bill Gates: 

"Headlines, in a way, are what mislead you because bad news is a headline, and gradual improvement is not." - Bill Gates

Where best to start than to dive into that part of Scotland’s risk investment market where 99% of deals take place. The 'underlying market' is a title that belies the importance of the range of investors and ambitious companies active in this sub £10 million market.

Whether or not 'underlying' is a worthy enough title for this dominant part of the market, it should not escape us that the total value of deals under £10 million have almost doubled in number since 2013. And much like Bill Gates’ gradual improvement quote, is a story of continued steady growth.

Chart 1: Deals and investments (£m) in Scottish companies 2013-2018

Deals and investments (£m) in Scottish companies 2013-2018

Scratch below the surface and you will discover that the headline 2017 peak of £538 million was achieved because of three very large deals, each exceeding £50 million (BrewDog, NuCana and ROVOP). Deals in Scotland that exceed £10 million are no longer a rarity; deals over £50 million clearly are. 

It is the presence of these very large deals that determine any investment rankings within the UK. Beyond the UK, the Republic of Ireland (ROI) is an interesting comparator, and where large deals really do dominate. In 2018, ROI companies secured total investment of £882 million across only 118 deals and 75% of these deals were for over £10 million. This is a feature of the strong presence of VC investors, particularly from the US, operating in the ROI market.  

A closer look at Scotland's performance

We can go further into the underlying market in Scotland to find out what growth stage companies have been up to. To do that, we can turn to activity in the investment bands between £2 million and £10 million, a stage of growth that attracts both VC and Corporate investors as well as Scotland’s Angel Groups co-investing with other groups and Scottish Enterprise. 

With 38 deals in the investment bands from £2 million to under £10 million, 2018 was well ahead of previous years in the series. The 32 deals recorded for 2016 is the only other year to break through the 30-deal threshold (despite the 2017 headline total there were only 26 deals in these growth investment bands).  

Reporting this detailed level of analysis is hardly the stuff of dreams for a headline writer; nonetheless, for avid market watchers it is a strong signal to medium-term market performance. 

Diversity of investors

Another strong signal for Scotland’s investment performance is the continuing diversity of investors during 2018; those investors from home and abroad that are keen to invest in compelling propositions prepared by Scottish companies. 

As the largest funder in 2018, VCs injected an average of £2.2 million into some of the most ambitious Scottish companies. 

Chart 2: Types of investor, by number of separate investments (participations) in 2018 

Types of investor, by number of separate investments (participations) in 2018

And VCs were not only attracted to the larger deals, such as the £18 million investment into medical device company DySIS Medical by London based Albion Capital and Denmark’s Lundbeckfonden Ventures. Significantly smaller deal sizes also won VC investment when LeanSquare and Meusinvest from Belgium invested £40k into Glasgow based music learning business Soundbops.  

Angel Groups continue to be the mainstay when it comes to supporting young and ambitious Scottish companies, participating in 60 deals with further evidence of the growing appetite for syndication between groups.

Angel Groups leading on deals of over £1 million are now a regular market feature, with 22 recorded for 2018. Our Risk Capital Market Report for 2018 notes the level of syndication taking place, such as the £2.2 milliom investment into Sunamp by Angel Groups Equity Gap and Highland VC who were joined by Par Equity, Osaka Gas, Edinburgh University’s Old College Capital and Scottish Enterprise.   

Scotland's crowdfunding market

Crowdfunding for 2018 reached a new high in Scotland with 17 deals raising over £35 million, compared to 13 deals raising £10 million in 2017. While equity crowdfunding is very important to these growth businesses, there are only a few campaigns raising over £1 million (three in each of the last two years) and it could be said that equity crowdfunding is yet to fully make its mark on the Scottish market. 

While there have been many more equity crowdfunding campaigns in Scotland compared to northern regions of England, the number of Scottish campaigns falls well short of those in the East and South of England, where the average is 30. 

Across the UK, public sector investment funds provide additional stimulus where it is needed and bodies like Scottish Enterprise, the Development Bank of Wales and the British Business Bank were particularly active in Wales (29% of deals), Scotland (23%) and the North East of England (21%). 

Sector performance

Since 2013 (at least) Scotland’s investment scene has been dominated by the digital and IT sector, securing some 41% of Scottish deals (643) and 38% of investment (£814 million). This is a similar picture to the whole of the UK.

By contrast, and over the same period, Scotland’s life science companies secured some 22% of Scottish deals (343) and 24% of investment (£504 million), with a higher average investment per deal. 

Looking again over the same period, companies in the renewables sector attracted 7% of deals (112) and 7% of total investment (£157 million). 

We can see this pattern continuing in the 2018 distribution below. 

Chart 3: Investment (£m) distribution by sector 2018

Investment (£m) distribution by sector 2018

Before leaving our brief look into sectors, it would be remiss not to raise the recent emergence of breweries and distilleries as strong propositions. Large investments have launched the food and drink sector to risk market prominence, securing 11% of deals (78) and 22% (£184 million) of investment over the last two years, resulting in an average investment per deal only exceeded by that of the oil and gas sector.  

Maintaining the investment pipeline

We may conclude that the Scottish market is far from being short of good news stories even if they do not merit a typical headline piece. However, if we continue our exploration we do find some serious challenges.  

For instance, it is vital for the future of the investment industry that any risk investment market generates a strong pipeline of new or first-time investment companies. Charts like the one below serves as a warning and while a single year of very low investment going into new companies may not point to drastic remedies, it does point to a need for further investigation.  

Chart 4: Scotland's investment pipeline - first-time vs subsequent (£m)

Scotland's investment pipeline - first-time vs subsequent (£m)

Business exits

Another challenge for risk investment markets anywhere in the world, is the continuing limited number of exits. The 11 Scottish exits during 2018 matches the average over the last five years and understandably this performance is spoken of as poor fare for investors. Outside of the golden triangle, only Scotland, North West England and South West England reached double figures for exits. 

Acquisitions

For Scottish companies, the UK and the USA were the homes of the acquirers in 2018, unlike 2016 and 2017, when Germany, Sweden, China, Israel, Spain and Iceland companies came knocking to own and grow Scottish based firms. The average age at acquisition was just over 10 years old, down from the 13 years old in 2017 and compares more to the 9 years old in 2016.     

By examining the market beyond the headlines, we hope we have created more interest in the health of Scotland’s risk capital market.  

Of course, there is much more to read, to consider and to debate.  

That is why we publish our main reports and why we welcome your thoughts, insights and challenges. If this piece does indeed get you interested in finding out more, then there is no better place to start than by reading our published reports online: 

Download our Market Intelligence report - October 2019 (PDF, 4MB)

The Risk Capital Market in Scotland – Annual Report 2018 

Investment Benchmarking Analysis – Annual Report 2018 

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If you want to find out more about the risk capital market in Scotland, or how we can help you identify the type of growth finance appropriate to your business, get in touch.