The changing landscape for equity finance in the UK

Dan van der Schans Economist @britishbbank Market Analysis Team www.british-business-bank.co.uk

Introduction

1.Recent trends in SME equity markets 2.Key challenges 3.Overview of British Business Bank Equity Programmes

Data sources: • Beauhurst provides information on UK equity deals by VC, angel networks, crowdfunding, Government funds, etc. • Pitchbook and Preqin

@britishbbank www.british-business-bank.co.uk 2 Recent trends in SME equity finance markets

@britishbbank www.british-business-bank.co.uk 3 UK has a relatively high amount of equity finance compared to other countries but lags behind the US

• Recovery from 2009 financial crisis • US equity to GDP ratio is nearly twice as high as UK (0.44% compared to 0.23% in 2015)

@britishbbank www.british-business-bank.co.uk 4 Pitchbook Equity market declined in 2016 following strong growth over previous 5 years

• 1,148 Equity deals (£3.4bn) in 2016 • 18% ↓ in deal numbers and 4% ↓ in investment amount compared to 2015

@britishbbank www.british-business-bank.co.uk 5 Investment peaked in Q3 2015, and number of deals declined throughout 2016

• Wider economic uncertainty with slow down in other VC markets in 2015-2016: – Europe: 19% ↓ in deals (25% ↓ by value) – US: 19% ↓ in deals (10% ↓ by value)

@britishbbank www.british-business-bank.co.uk 6 Business stages…

Beauhurst Invest BVCA Broad Description

Classification Europe Seed Seed Seed Young companies being setup or been operating for a short time, but have not

yet made any commercial sales. Start-up

Venture Start-up Other Early stage Companies that has been around for a Later Later Stage Venture few years and is in the process of gaining stage significant market traction. Sales are venture growing rapidly but unlikely to be profitable.

Growth More established companies that has been around for at least 5 years. Likely to have multiple offices or branches with

substantial revenue streams (some of them may be profitable).

Expansion or ‘Growth Growth Capital’

@britishbbank www.british-business-bank.co.uk 7 Differences exist by business stage, with seed stage funding increasing in 2016 despite lower deal numbers

• Seed stage: Investment ↑ by 44% but 9% ↓ in deals compared to 2015 • Venture stage: 28%↓ by value and 26% ↓ by number • Growth stage: stable with 1% ↓ by value, but 22% ↓ in number of deals

@britishbbank www.british-business-bank.co.uk 8 Improved funding environment over the last few years for early stage companies

• Seed stage deals formed 39% of all deals in 2011 but ↑ to 50% in 2016 • Increase also seen in funding amounts going to seed • ECF, Angel Co-Fund and tax based schemes (EIS and SEIS) have all contributed to funding environment

@britishbbank www.british-business-bank.co.uk 9 Increase in equity deal sizes in recent years

• Average deal size £3.7m in 2016, ↑ from £3.2m in 2015 • 39% of deals (with disclosed investment amounts) are below £500k • 10 largest equity deals in 2016 formed 23% of total investment • The number of deals up to £499k and £500k-£999k both ↓ by 27% compared to 2015 • Number of deals greater than £10m ↑ by 18% in 2016

@britishbbank www.british-business-bank.co.uk 10

Private Equity (including VC) is most active type of investor in 2016

• Decline in deal numbers in 2016 seen across most investor types • After rapid growth between 2011-2015, crowdfunding deals ↓ by 18% in 2016

@britishbbank www.british-business-bank.co.uk 11 Increasing importance of crowdfunding in SME equity markets

• Crowdfunding involved in 25% of all deals in 2016 (34% of seed deals) • Crowdfunding involved in the highest number of seed stage deals in 2016 (192) compared to 132 for PE/VC funds

@britishbbank www.british-business-bank.co.uk 12 Technology/ IP based sector received the most deals and investments in 2016

• There were 440 Technology/ IP based deals in 2016, receiving £1.7bn of funding • Technology forms 38% by number and 49% by value of total market • Software forms the largest technology sub sector followed by life sciences

@britishbbank Based on weighted counts www.british -business-bank.co.uk 13 Three Challenges

1. Regional disparities 2. Finance for scale-up companies 3. Financial returns and exits

@britishbbank www.british-business-bank.co.uk 14 Challenge 1: Regional disparities in equity finance

• London received the greatest amount of funding (56% by value, 47% by deals) in 2016 • High growth businesses spread throughout the UK

@britishbbank www.british -business-bank.co.uk 15 London’s concentration is even greater if Government funds are excluded

• Lower fund manager presence in areas outside of London:

Number of unique equity investors per region (excluding VC listed as one VC as primary government investors) investment type investment type London 531 305 SE 42 26 EE 34 25 Scotland 33 22 NW 27 15 WM 18 11 EM 9 8 NE 8 4 Northern Ireland 8 6 SW 8 4 Y&H 7 4 Wales 2 2 Grand Total 647 391

@britishbbank www.british-business-bank.co.uk 16 Pitchbook Demand side issues are also important

Awareness of different sources of finance by area

• Lower awareness of VC and business angels in areas outside of London, but crowdfunding more spread out

@britishbbank www.british-business-bank.co.uk 17 BBB SME Finance Survey

There are clusters of deal activity in 2016…

Glasgow Newcastle

Birmingham Oxford

Cardiff

@britishbbank www.british-business-bank.co.uk 18 BBB programmes

• £400 million Northern Powerhouse Investment Fund (NPIF). Launched in Feb 2017 to help SMEs in North West, Yorkshire & the Humber and Tees Valley to access funding.

• £250m Midlands Engine Investment Fund (MEIF) announced in March 2016 budget.

@britishbbank www.british-business-bank.co.uk 19 Challenge 2: Later stage equity finance

Average VC deal size by area Firms with subsequent funding $US m, 2013-2015 transactions rounds % after Seed/Series A, 2008-10 cohort UK 100% = 228, US 100% = 2,724 $29.8 68 B 62 $22.3 $20.4 C 43 32

D 23 9

$4.2 E 3 10 $3.0 $3.6

F 3 0 G Early Stage Later Stage 1 0 Europe UK US

@britishbbank 20 Source: Preqin www.british-business-bank.co.uk Challenge 3: Financial returns from investing in VC are poor compared to PE and public markets

IRR (% p.a) 10 years

Private Equity Total 13.2 Venture Capital 5.1 pre-2002 vintage funds -0.3 2002 vintage funds onwards 7.9 Small MBO 23.5 Medium MBO 16.0 Large MBO 12.9 Selected comparators FTSE All Share 5.6 Total Pension Fund Assets 6.2

BVCA data is net of costs, fees and charges. Returns from comparators are gross returns (so over estimate potential returns to investors).

Source: BVCA PE and VC Performance @britishbbank Measurement Survey 2015 www.british-business-bank.co.uk 21 Sub-optimal investment cycle

@britishbbank www.british-business-bank.co.uk 22 BBB programmes

• £400m of funding announced at 2016 Autumn Statement to expand VC Catalyst programme to focus on later stage VC. • Delivered by BBB’s commercial arm (BBBI) to invest in fund managers with track record and leverage in private sector investment to support the UK’s venture capital ecosystem.

@britishbbank 23 www.british-business-bank.co.uk Main Findings

1. Equity deals increased over 2011 to 2015 but declined in 2016 across all main types of investor (including crowdfunding) as part of a wider market slowdown.

2. Equity remains concentrated in London, despite high growth businesses being located throughout the UK. This is due to both supply and demand side issues, but clusters of deal activity are forming in areas outside of London.

3. In recent years, there has been improvements in the availability of funding for early stage companies, but there is now a later stage funding gap affecting scale up companies.

4. Financial returns from investing in VC need to increase in order to be attractive to institutional investors, to create a long term sustainable model.

@britishbbank www.british-business-bank.co.uk 24 British Business Bank plc is a public limited company registered in England and Wales registration number 08616013, registered office at Foundry House, 3 Millsands, , S3 8NH. As the holding company of the group operating under the trading name of British Business Bank, it is a development bank wholly owned by HM Government and is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). British Business Bank operates under its own trading name through a number of subsidiaries, one of which is authorised and regulated by the FCA.

British Business Finance Ltd (registration number 09091928), British Business Bank Investments Ltd (registration number 09091930) and British Business Financial Services Ltd (registration number 09174621) are wholly owned subsidiaries of British Business Bank plc. These companies are all registered in England and Wales, with their registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. They are not authorised or regulated by the PRA or FCA.

Capital for Enterprise Fund Managers Limited is a wholly owned subsidiary of British Business Bank plc, registered in England and Wales, registration number 06826072, registered office at Foundry House, 3 Millsands, Sheffield, S3 8NH. It is authorised and regulated by the FCA (FRN: 496977).

British Business Bank plc and its subsidiary entities are not banking institutions and do not operate as such.

A complete legal structure chart for British Business Bank plc and its subsidiaries can be found at www.british-business-bank.co.uk. @britishbbank www.british-business-bank.co.uk BBB 011214 22