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Scotland's risk capital market

Broomielaw Tradeston Bridge, International Financial Services District (IFSD), Glasgow

Scotland's early stage risk capital market

Despite the economic upheaval brought by COVID-19, the Scottish early stage risk capital market is holding steady, in part thanks to targeted support. Find out why there's cause for optimism as 2021 progresses.

What a pandemic does to a growing risk capital market: Scotland in focus

Holding steady is a good description for the performance of Scotland’s early stage risk capital market in 2020, and a significant achievement in the context of the economic upheaval confronting the wider economy. With Scottish GDP not expected to recover to its pre COVID-19 level until the start of 2024, it is even more important that we in Scottish Enterprise continue to focus our efforts on increasing access to early stage growth capital and supporting the companies with potential to make a strong contribution to Scotland’s economic recovery. 

Our evidence base underpins our approach and directs us to where we can make the most of our people and resources to support the early stage market.

Looking beyond our borders gives us an insight to emerging trends and helps to set Scotland’s performance in the context of other nations and regions of the UK. Importantly, this identifies where we share challenges and opportunities.

Solid performance in 2020

As the pandemic began to unfold at the end of the first quarter of 2020, there was no clear consensus on how the risk capital market may be impacted. Looking back now on 2020 with the benefit of hindsight (and the available data), the market appears to have held up well. Even with deals and investment down by 11% and 16% respectively, 2020 was still the second-best performing year on record for the UK equity market.

As with previous years, our benchmarking analysis shows that Scotland continues to be one of the most active equity investment markets in the UK.

Scotland for the fourth year in a row attracted over £400 million of equity investment, with £430 million invested across 446 deals, the highest year on record for number of deals.

Scotland had the highest number of deals, after London (2,986 deals) and the South East of England (725 deals). Due to the distribution of very large deals across the UK, the amount invested tells a different story, with the golden triangle, the North West and West Midlands securing higher values of investment than Scotland.

Early stage businesses: challenges and support

In the first half of 2020 we anticipated, based on the emerging evidence, that investors would be concentrating their time and resources on their existing portfolios. This in turn would make it even harder for very early stage businesses and those seeking equity for the first time to secure the investment they needed.

Our evidence suggests that the pre COVID-19 trend for investors to favour later stage and lower risk investments has been accelerated by the pandemic. This brings the risk of weakening the earlier stages of the investment funnel and growth pipeline, with obvious implications for the number and quality of investment opportunities that progress towards series A investment and beyond.

This trend is also evident when we look at investment in lower size bands. While not all deals under £500,000 go into very early stage and new investments, this is the space where these investments are most represented. Total investment at this level fell by 12% across the UK (deals down by 14%), while remaining stable in Scotland.

In part this can be explained by the £25 million Early Stage Growth Challenge Fund delivered by Scottish Enterprise, which provided grant and Convertible Loan Notes of up to £300,000 to 90 early stage Scottish companies. In addition, pre-seed start-ups identified as having the most significant potential to grow and attract future investment received £3 million grant funding support provided by Scottish Government and delivered by Scottish Enterprise. These companies will play an important role in strengthening the early stage pipeline.

Ongoing support for recovery and growth

As we progress through the early part of 2021, there is reason for optimism. Given the overall economic challenges the pandemic has brought, the Scottish early stage risk capital market has and continues to hold up well, mirroring a lot of what we are seeing elsewhere in the UK.

As the term patient capital implies, equity investment is based on a long-term horizon and this may help to explain why investment appetite was not as suppressed as might have been expected. With signs that investor appetite is strong and many early stage, high growth companies are able to adapt to changing circumstances, the prospects for 2021 and beyond look promising. However, the early stage of the pipeline remains the most fragile part, and is in need of ongoing collaborative support from the public and private sector.

To find out more about the Scottish investment market in 2020, download our Risk Capital Market Report (PDF, 3.24MB)

Read more about Scottish Enterprise's early stage investment activities.

 

Ask an adviser

If you want to find out more about the risk capital market in Scotland, or how we can help you identify the type of growth finance appropriate to your business, get in touch.