A vibrant and diverse equity market is essential to help early stage and high-growth firms deliver on their potential. Outside equity investment becomes an important source of finance for companies with growth potential. For a specific group of businesses, with the potential for good growth but lowrisk level, bank finance is unsuitable or unavailable, hence external equity finance is essential to achieve their full potential. Equity investment is an important component of industrial and business policy despite less than 1% of small firms financing themselves using equity from external providers such as venture capital funds.

Equity investment has increased in the last 4 years in the UK, due to growth in seed and growth activityand due to risk appetite of investors changing, since the crash of 2008. New data shows positive trends in equity investment to small firms, with the number of deals and the total amount invested clearly higher than last years.

The growth in equity investment is anchored by a positive surge at the seed and growth stages. The enhanced performance in seed deals, is result of a mature funding environment at the seed stage, backed by significant support from Government in the form of the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust Scheme (VCT) tax reliefs.

Tax incentives presented and functioned by HM Treasury and HM Revenue & Customs are also particularly important to inspire early stage investment by private individuals. The Enterprise Investment Scheme, Seed Enterprise Investment Scheme, and Venture Capital Trusts are an important aspect of the market, and of Government’s support for small and growing businesses.

Businessmen and stockholders are, however, highly driven by personal tax considerations: stockholders in particular have a clear personal tax incentive to indulge in equity investment. But the focus here is instead on the motivations of businessmen and how they approach different forms of finance. The experience of how small businesses approach external finance points to a different set of considerations for these firms compared to larger businesses.

The growth shows enhanced investment, with an accumulative share of funding provided in deals of more than £10m. Institutional funding is noteworthy than the Government at this stage. Within this total, there has been a momentous increase in investment in software sector, but the venture-stage has failed to achieve the increases observed at the seed and growth stages. The available evidence suggests the equity gap persists, and extends to larger deal sizes.

The gap in venture-stage investment is most prominent in the £2m-£5m range, where levels of investment reduced from 2011 to 2013, before undergoing a ricochet in 2014. Earlier stage (seed) investment seems to have survived well since the financial crisis, but that “later stage” (venture) investment and fundraising have seen condensed investment. Funds that are raised often include Government funding, with institutional investors’ share declining.

 

Equity Crowdfunding is also on rise in the UK, which has different impact on the number of deals and amount invested. Where the number of deals almost accountingfor one fifth of the total number of deals in the UK, these numbers have had a constant growth in the last 3 years. The impact of crowdfunding has not been as significant with an increase of only 2 % in the last 2 years that does not really means that this is a weakness. With London and the South being the concentration points of the crowdfunding platforms, it co-relates to London being the top performer for crownfunding deals and investments. Internet service and Technology sector is the leader in crowdfundingopportunities. The unsettling impact of Equity crowdfunding is being viewed in the UK and it will impact the investment scenario in the UK in the years to come.

The UK is a foremost participant in the European Venture Capital (VC) arena, but has inclined to lag behind the most successful international examples. The UK has traditionally been the principal market within Europe for VC investment – although France and Germany have made recent improvements. An assessment of VC investment as a section of GDP shows the UK market generally out performs its European opponents, but lags behind the leading world performers like Israel, the USA and Canada. The policy tools applied are bizarrely similar across countries, suggesting there is a common understanding and use of the most suitable policies, but the underlying ecosystem is stronger in certain countries.

The UK and Ireland has seen a steady stream of small transactions, rather than handful of outlier deals boosting the aggregate deal value. Recent changes to the Enterprise Investment Scheme (EIS) have also meaningfully amplified the amount of investment supported by the scheme, improving the early stage equity culture of the UK.

The listed public equity markets also play a vital role in providing equity finance to growing UK trades. They are imperative not only for the support that they give to individual businesses mentioned on those markets, but also as a revenue for venture capital and other earlier stage investors to exit their investments as businesses reach advanced stages of growth.

For their position in backing the wider atmosphere for equity finance in the UK, recent noteworthy changes have been made to expand the financing environment further for companies. This includes:
• The elimination of stamp duty on purchases of shares made on equity growth markets, increasing liquidity in equity growth markets.
• Making changes to enable SME equity shares self-confessed to trading on a recognized stock exchange to be held in a stocks and shares ISA.

The UK and Ireland equity markets have been fairly vibrant for the last 5 years considering both value and number of deals. If we look at the buyout value by region UK and Ireland clearly head with32% of the whole lot, with France at 13% and Germany at 10% (source –Private Equity Trend Report 2015 by PWC) closely behind them.

Looking onward, the Government aims to work with its European partners to bring a Capital Markets Union, with a view to make the most of the benefits of capital markets (including equity markets) for the real economy. The Government will seek to safeguard the businesses and have appropriate access to equity markets. The Equity market in the UK is on a rise and it is slowly but surely reaching its prime position. With Germany and other European nations closing in, UK will be on the focal point of European Equity Opportunities.

Ms Nandita Sahgal,
Chief Executive Officer of IL&FS Global Financial Services ( UK ) Ltd.
IGFSL, UK is a 100% subsidiary of IL&FS Financial Services Ltd.

Website link : http://www.ilfsifin.com/UK/index.html

 


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