The unrelenting and indiscriminate effects of Covid-19 have left UK businesses facing some of their biggest challenges in living memory. The vaccine is now cause for celebration, notwithstanding the challenges of the new virus variants, and will in time usher in the next iteration of the “new normal” if all goes to plan. Private equity and venture capital are ready to play an important role in the UK’s growth-led recovery to get the country to that position.
Response of sector
The role the industry can play is evidenced by the rapid adjustments made by firms and their portfolio companies throughout 2020. After continued successes leading up to the pandemic – the combined asset classes were responsible for £47.59bn in fundraising in 2019, up from £34.12bn in 2018 – the first six months of 2020 brought a substantial dip in dealmaking activity. This is unsurprising in the circumstances, but should not be confused with inactivity: the success of private equity and venture capital is based on active owners complementing the pools of capital invested in businesses with relevant expertise and governance.
In 2020, that active engagement helped countless businesses to navigate the most turbulent of times, with the health and safety of employees critical priorities throughout.
The resilience of the industry became clearer in the latter half of the year when both UK and global dealmaking activity rallied. Interest in key sectors such as healthcare grew considerably and investment in them, as well as their continued growth, is expected to persist long into 2021. And UK biotech firms saw a record £1.39bn of venture capital financing, as firms regained their focus on fundraising and growth.
Industry performance in 2020, and the availability of substantial investment funds for immediate deployment, indicates there are strong foundations to build on, with great opportunities in UK business as the focus shifts from stabilisation to recovery.
Private equity and venture capital are not only well aligned to this core government objective, but to other pressing priorities, too.
We all understand that addressing the economic and other gaps between the north and south of England, and between the nations and regions of the UK more generally, is important for all policymakers. Private equity and venture capital already have a track record here – the geographic spread of the industry’s investment has increased greatly in previous years, with the South East, South West and West Midlands all presenting themselves as productive destinations for investors.
This extends further, with the North West of England seeing close to 10% of all private equity and venture capital investment in the UK in 2019.
And these trends are expected to continue: Oxford, Cambridge, and Bristol received record venture capital investment in 2020, illustrating that London is far from being the sole focus of the industry.
This then highlights a third area where the industry is well aligned to policymakers’ priorities – strengthening the competitiveness of the UK’s economy. As far as the innovation agenda is concerned, the industry, from venture through to global private equity, is developing the next generation of tech businesses and helping others to adapt and scale to succeed in the fast-changing global economy.
And in the year of COP-26, as we focus on how to deliver “Net Zero”, climate change and sustainability are front and centre for the industry, too. Firms are, more than ever, alive to the need for a responsible approach to investing and an increasing number are seeking portfolio companies with a strong ESG focus – for instance $11bn alone has been invested into European tech companies targeting climate action since 2016. And this desire for investments to “do better” extends far beyond just the diversification of portfolios. Firms are now building teams that specialise in ethical investment or ensuring all members of staff are fully trained in identifying ESG opportunities, highlighting serious commitment to societal benefit through their work.
One other contribution by the industry to the UK economy needs to be remembered, too – we currently host the largest hub of private equity and venture capital expertise in Europe, in global terms, second only to the United States.
International capital flows and people from all parts of the world are drawn to the UK because of this, underlining our global position as a leader in financial services, and putting the UK in a strong place to see the capital invested in businesses here, too. This standing has been built on a strong business environment and an internationally competitive investment climate, which we hope to see continue.
Through whichever lens you survey the landscape, private equity and venture capital have both been instrumental in keeping things afloat and are committed to their role in the regeneration. As circumstances have rapidly changed, they have been some of the quickest to adapt and find workable solutions. It is clear that these asset classes are resilient, flexible, and unwilling to back down, and given their performance across 2020, they have more than earned their stripes to help take us forward in 2021.
Michael Moore is director general at the British Private Equity & Venture Capital Association (BVCA).
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