The number of announced equity investments into UK-headquartered non-listed companies dropped significantly between the fourth quarter (Q4) of 2015 and the first quarter (Q1) of 2016 – from 314 to 280. We could claim the drop is not relevant, since it applies to a comparison between different seasons. But equity investments also fell between Q1 2015 and Q1 2016 – from 371 to 280. Therefore seasonality alone cannot explain the variation.
But, despite the drop in deal numbers, the aggregate investment amount actually went up in Q1 2016 – Q1 2016 saw £1.18 billion invested, compared with £1.03 billion in Q1 2015, and £0.91 billion in Q4 2015. The main beneficiaries of this increase, in absolute terms, between Q4 2015 and Q1 2016, were growth-stage companies. (We at Beauhurst divide companies as being in one of three main stages of evolution: seed, venture and growth, using a range of criteria. We’ve written elsewhere about how our criteria compare with more traditional industry criteria.)
Figure 1. Number of deals vs amount invested (announced only)
Growth-stage companies are generally less risky than companies at the seed and venture stages. Our conclusion, therefore, is that there is still a lot of money interested in the asset class, but the appetite for risk has gone down. It could be argued that some of that is due to the possibility that the UK may decide to leave the EU in the June 23rd referendum; but there are plenty of other macro-economic concerns that may be getting investors jumpier, such as the Chinese economy and the price of oil.
Beauhurst also tracks unannounced deals (those that are never publicly reported). Unannounced deals represent almost 50 per cent of the market by number of deals but only around 20 per cent by investment amount. Broadly these mimicked the visible market – numbers sloped.
Crowdfunding boosts seed investment
Seed-stage companies also saw a healthy doubling of amount invested. That is perhaps due to the apparent ubiquitousness of equity crowdfunding. Investors into growth-stage companies tend to include institutional investors (such as private equity firms) and others with very deep pockets. Crowdfunding, on the other hand, tends to attract smaller investors and puts before them mostly seed-stage companies. It’s perhaps therefore not surprising that seed-stage companies saw such a boost. Indeed, the top two investors (by number of equity investments) were two equity crowdfunding platforms, Seedrs and Crowdcube.
Investment in software startups drops
In terms of sectors, the biggest loser was arguably software. We can only speculate, but if we are correct in our interpretation of the markets as having been more risk-averse in Q1 2016 than in Q4 2015, then it could be argued that software businesses suffered because they are more easily replicated and more vulnerable to competition than most other sectors. That may go some way toward explaining why investors gave them the cold shoulder this quarter.
Tower Hamlets had more deals than Edinburgh and Manchester combined
Finally, in terms of regional breakdowns, there are no surprises – London came out on top. Its dominance is so pronounced that Tower Hamlets, the fifth most active London borough, had more deals than Edinburgh and Manchester combined.
Figure 2. Number of deals per region
- This post is based on The Deal Q1/16, a Beauhurst report. For Beauhurst’s methodology, please click here.
- The post gives the views of its authors, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Prank Sky Media, CC-BY-SA-2.0
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Pedro Madeira is Head of Research at Beauhurst, overseeing a team tracking investment into high-growth UK companies and monitoring trends around the country. He is an in-demand commentator on equity investment, crowdfunding and the fast-growth landscape. Before joining Beauhurst in 2011, Pedro worked at The Mergermarket Group. He holds a BA and MPhil in Philosophy from King’s College London and the IMC qualification from the CFA Society.