Investment into small companies grows by 88% to £18.1bn in 2021 - report

The British Business Bank’s recently released Small Business Equity Tracker is based on Beauhurst data showing that 2,616 announced equity deals in 2021, which is a 17% increase on the 2,244 recorded in 2020. Small businesses are defined as companies with fewer than 250 staff and turnover of less than €50m (or a balance sheet total of less than €43m).

The report also shows that the strong momentum continued into Q1 2022, with £7.6bn of equity investment in the small-business space, the highest amount invested in a single quarter and nearly double the £4.3bn seen in Q1 2021.

“The momentum continued in Q1 of this year – a clear sign of investor confidence in UK smaller businesses following the pandemic,” said Catherine Lewis La Torre, CEO of the British Business Bank. “The UK’s position as a hub for the technology sector is apparent and the growth in clean-tech deals shows an increasing investor demand for sustainable businesses to grow.”

The tech space was indeed a standout, with the total volume of investment rising to £8.2bn in 2021, up from £4.1bn the previous year. Within this sector, investment into smaller businesses in the life sciences sector rose from £800m in 2020 to £1.7bn in 2021 and software deals more than doubled from £2.3bn in 2020 to £4.8bn in 2021, in line with wider equity market trends, the bank noted. The research also shows a 30% increase in the number of clean-tech deals with £436m invested into this sector across 72 deals.

As highlighted by the increase differential between the volume and aggregate value of 2021 investments, the size of the average equity investment in the UK sharply increased in 2021. This is in part due to increased competition for deals among investors, as well as increased participation from overseas and crossover investors with access to large amounts of capital, the bank said. The average venture-stage deal in 2021 was £5.1m, a 50% increase on the £3.4m recorded in 2020. The average growth-stage deal was £27.3m, a 68% increase on the £16.3m recorded in 2020.

London’s concentration of equity activity increased in 2021, but there is evidence of strong clusters developing outside of London, according to the report. In 2021, 1,286 deals worth £11.9bn took place in London, 49% of the UK’s total number of equity deals and 66% of total investment. Nevertheless, activity thrived outside of the capital too, with 1,330 deals worth £6.2bn in the English regions outside of London and in the devolved nations - an 11% year-on-year increase in the number of deals and an 88% increase in the investment value.

Venture trends

The UK retained its position as the largest venture capital market in Europe, larger than France and Germany combined, according to the report - although the bank noted that the latter two have seen faster growth in the size of their VC markets since 2015. For instance, German VC investment nearly tripled between 2020 and 2021, from £5.6bn to £14.1bn.

The UK also still lags behind the US when it comes to VC investment, which has nearly doubled in the US market between 2020 and 2021, from £128bn to £254bn. The funding gap between the UK and US is primarily driven by varying levels of funding going into R&D-intensive sectors, with the UK having a lower deal and investment share going to this sector, according to the bank.

British appeal

Last year saw a sharp increase in the number of small business deals involving an overseas investor, the report shows: 753 such deals were recorded, 58% higher than in the previous year and equating to 29% of all 2021 deals. Overseas investors were involved in equity deals to the value of £13.5bn, which is equivalent to 75% of the total £18.1bn invested during the period. The US ranks the highest for number of deals its investors make in UK companies, followed by European investors.

The bank said it supported around 18% of all announced UK equity deals in 2021, with a more even regional distribution throughout the UK than other investors: the proportion of deals it backed outside of London (53%) was larger than that seen across the wider PE/VC market (48%). Seed- and growth-stage deals supported by the bank are generally smaller than the wider market, while growth venture deals tend to be larger, it also noted.