Henry WhorwoodGeorge Osborne first outlined the notion of a Northern Powerhouse to an audience at Manchester’s Museum of Science and Industry on 23 June 2014. The initiative, which encompasses the North East, the North West, and Yorkshire and Humberside, aims to drive local growth through transport, science and innovation, and the devolution of authority. Compared to the media hype, Henry Whorwood examines how powerful  the idea is in reality.

According to deal numbers, in the first three quarters of this year 157 equity deals were completed within the Northern Powerhouse, on course to match 2014’s 200. Evidence perhaps, that George Osborne’s vision is gaining traction.

But this Northern narrative is not quite so simple. The North has enjoyed some growth – but it is part of a wider, nationwide growth. Viewed against figures for the UK as a whole, it becomes apparent that the North is struggling to keep up. In 2013 the North accounted for 21.3 percent of the UK’s deals, but in the first three quarters of this year it was responsible for 17.3 percent. What’s more, total investment into the Northern Powerhouse for the first three quarters of this year was £206.3m. Which, as it stands, is not projected to reach 2014’s total investment of £338m – despite the wider UK market seeing unprecedented levels of investment this year.

Clearly, not enough is being done to balance the economy. Not only does the Northern Powerhouse need to continue to grow, but it needs to accelerate its growth rate. To do this it will need to replicate the success of innovative Northern companies receiving investment.

For example, Accrol Papers secured £66m investment from NorthEdge Capital in July last year. Investment management firm AJ Bell completed a £21m deal with CF Woodford Equity Income Fund and the Woodford Patient Capital Trust this June. And Xercise4Less, which has secured investment four times since it was founded, received a follow-on £5m from the Business Growth Fund in January this year.

But more is needed, says James Drew, CEO & Lead Developer at North East based software company Ambix: “I’d like to see a little less short-sightedness. The UK tech industry doesn’t just exist in London. There are a lot of bright young people, and experienced people, that need the funding to get things off the ground.”

“I am a supporter of the concept of a Northern Powerhouse” says Dr. Alasdair Bremner, co-founder of Central Lancashire University spinout AluSiD. “What needs to be attached to it is infrastructure. You can talk about a Northern Powerhouse, but in order for it to work you need to put investment into bigger stuff that smaller companies need. For me that’s improved transport connections across the North, not just to London.”

The Northern Powerhouse is still in its infancy. Regional devolution, as well as other initiatives and entrepreneurial developments – such as Innovate UK projects – are yet to mature. There are promising signs, but the Northern Powerhouse has work to do if it is to live up to the Chancellor’s grand ambitions.

London takes more of the pie

London – as one would expect – is the dominant force for equity activity in the UK. But over the last few years it has been taking an ever-larger share of the investment pie.

Powerhouse graph 1

In 2011 London-based companies accounted for 31 percent of deals, but in the first three quarters of this year that had grown to 43 percent. Even more startlingly, London’s share of the total amount of money invested in the UK grew from 34 percent in 2011 to 53 percent this year.

powerhouse graph 2

The growth in London’s share has been observable every year since 2011. Last year, The Centre for Economics and Business Research predicted that London would account for one third of the UK’s total economic growth until 2019. That London’s share of equity fundraising is well above this predicted third begs the question whether the capital might be depriving other regions of the funding they need.

While London has only grown in its dominance, as we have seen, the Northern Powerhouse has so far failed to take on the city as a powerful alternative investment hub.

More needs to be done to combat the domino effect; the more growing companies are based in London, the more investment vehicles want to be there too. This prompts more companies seeking investment to move to or start up in the capital. It becomes a virtuous cycle – at least for the businesses and investors in London. When will the rising costs in the capital, for both employees and their employers, cause businesses to look elsewhere?

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Notes: A version of this article originally appeared on LSE Business Review The article represents the views of the author and not the LSE. Please read our comments policy before posting.

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About the Author

Henry Whorwood

Henry Whorwood completed a Bachelor’s degree in Classics at the University of Oxford. He joined Beauhurst as a Research Analyst and is the lead author of The Deal, Beauhurst’s quarterly review of the fast-growth company landscape. When he isn’t busy with report writing, he splits his time with the Sales team, where he liaises with the technology transfer arms of UK universities.

(Featured image credit: Matt Buck CC-BY-SA-2.0 All graphs provided by Beauhurst)

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