Equity investment in small firms has more than doubled in past three years
British Business Bank report finds encouraging figures for equity finance but reveals gap in venture stage investment
Equity investment into small businesses has more than doubled over the past three years according to a new report by the British Business Bank.
The research has shown strong year-on-year growth in the use of external equity finance by small and medium firms – with the number of deals competed during the first three quarters of 2014 up by 170%, in comparison with the same period in 2011, and the amount of investment having increased by 125%.
The report also highlights some gaps in the availability of equity finance, especially for not more capital-intensive growing businesses. In light of this it makes a number of recommendations and commitments to ease access to equity finance in the UK.
These commitments include investing £400m in venture capital over the next three years, and to produce a regular ‘tracker’ of small business equity investment in the UK to provide a step-change in information available on the levels of equity finance in the UK.
The report recommends that institutional investors should consider investing in funds targeted at small businesses again, and encourages a debate on the availability of ‘patient’ capital to support the sustained growth of small businesses making longer-term capital intensive investments.
The research cites increasing activity at the seed and growth stages as being the main driver for the growth in equity investment, with an increasing share of funding provided in deals of more than £10m.
In contrast, investment at the venture stage has seen very little growth, suggesting the equity gap persists and is extended to larger deal sizes. The biggest gap in venture stage investment seems to be evident in the £2m-£5m range, where levels decreased from 2011 to 2013 before rebounding in 2014.
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Cyclical problems as a result of the financial crash had severe implications for the availability of venture capital, with private investors moving toward safer, and more liquid investments.
The report includes other specific recommendations for how the British Business Bank and Government could improve the functioning of equity markets for small businesses. These include extending the Enterprise Capital Funds programme and investigating options to expand the Angel CoFund with private sector capital.
Business secretary Vince Cable said: “I set up the British Business Bank two years ago to enable businesses to access alternative forms of finance which the big banks are currently falling short on.
“The availability of long term finance has been a longstanding problem, but this new report shows how we have opened up access to equity finance. The British Business Bank will play an increasingly important role in filling in the remaining gaps, including investing £400m in venture capital over the next three years.
“But the Bank cannot fill these gaps by itself. Institutional investors should also consider investing in funds targeted at small businesses.”
Keith Morgan, CEO of the British Business Bank, said: “Equity and other types of growth finance are a small but disproportionately important part of the UK economic landscape. As confidence among smaller businesses strengthens, the British Business Bank is committed to increasing the supply of finance to help these businesses grow.”