Consumer services

SMEs attracted record equity during the pandemic

Small businesses in the UK have attracted a record amount of equity capital during the pandemic as tech-driven businesses flourished and others were aided by a government Covid emergency fundraising program.

Equity investments in UK small businesses hit a record £ 8.8bn last year – a 9% increase – and continued through the first three months of 2021, when an amount an additional £ 4.5 billion has been raised. This is the highest amount ever recorded in a single quarter, according to a report by the British Business Bank (BBB), a state-owned company.

The figures highlight the bifurcation of the UK small business economy. Thousands of small businesses struggled during the lockdown, forced to close or unable to fully trade in industries such as hospitality, retail and travel.

But others in e-commerce and digital services have benefited from the increased demand for their services, with the majority of the population being forced to stay at home. These have attracted record levels of liquidity from investors sitting on large pools of unspent funds. Almost half of total UK small business equity investment was in tech, BBB says.

The government Covid Future Fund program has also helped boost fundraising by matching private sector funding using convertible loan notes. More than 1,100 companies have used the program to raise £ 1.1 billion.

Excluding the activity of the Future Fund, which represented about a tenth of generally smaller fundraisers, trading volume would have declined slightly but value would still have increased last year, according to the report.

The BBB, which oversaw the Future Fund program, supported around a fifth of UK equity trades announced in 2020. The research was carried out by data provider Beauhurst.

Catherine Lewis La Torre, CEO of the BBB, said the funds raised were a “clear sign of the return of investor confidence in British small businesses and the country’s economic recovery”.

Many of the loan notes issued by the Future Fund are now converted into shares. Le Torre said the BBB is offering the Treasury options on how to manage these holdings in the future.

The BBB is overseeing the launch of a second Future Fund program that will invest £ 375 million in so-called “deep tech” and R&D intensive companies.

Investment in cutting-edge technology – which refers to areas outside of consumer services such as life sciences, renewables and AI – has increased significantly over the past five years, increasing by 291 % to £ 2.3 billion.

Research has also shown greater regional diversity in the distribution of investments: the share of transactions of London-based companies has fallen sharply, from 68% in 2016 to 42% in 2020.

The activities of the BBB, an economic development bank that also oversaw the Treasury’s various emergency coronavirus loan programs, have come under scrutiny in the context of the Greensill Capital scandal. The bank allowed the supply chain finance company, which collapsed earlier this year, to make loans under one of the government-guaranteed programs.

The BBB is investigating how Greensill became an accredited lender under the Coronavirus Large Business Interruption Loan Program. Le Torre declined to comment on the investigation.

The government’s emergency Covid programs are all closed to new loans, although the BBB has overseen the launch of a new “payback” loan program that offers a partial state guarantee for business bank loans.

This scheme has been criticized for allowing interest rates of up to 15 percent and the need for personal guarantees. Bankers said take-up has been very low so far. La Torre agreed that lending under the program was at “low levels”, but said this reflected the return to normal of the private lending market.

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