PRIVATE EQUITY INVESTORS SHOULD FOCUS ON SCALE-UPS NOT START-UPS

Recent news has focused on record highs for private equity investments in the UK. But are investors aiming funds towards too many start-ups and forgetting the all-important scale-ups? Luke Davis, CEO of IW Capital and Co-founder of Crowdfinders and Money&Co., delves deeper into the importance of directing more investments into the country’s high-growth businesses.

Invest Europe recently revealed some interesting figures which showed that private equity investment in Europe rose by 14% in 2015, despite the fact that the number of companies who received private equity investment fell by 13%. This indicates that the value of individual investments is rising while the actual volume of these types of deals is dwindling. These figures provide a valuable insight into investor behaviour – rather than giving less money to a wider range of start-ups, a proportion of investors are starting to direct their finances into a more select group of SMEs.

This somewhat mirrors a trend that has been recognised across the pond in the US and should be seen as a positive development in the alternative finance market.  Funding for the scale-up business community, rather than start-ups, is an essential step for the UK if it is to fulfil the potential of its private sector, of which an astounding 99% are SMEs.

A recent report by Barclays and the business schools at the University of Cambridge and the University of Oxford explained that “gazelles” (companies that grow turnover by 20% for three consecutive years) are an increasingly rare occurrence. These businesses only amount to 2% to 4% of small to medium enterprises across the country – a worrying factor when taking into consideration that these “gazelles” are accountable for a large proportion of the UK’s SME growth. To sustain the high-growth capabilities of our small businesses, funding is essential.

A perfect example of the importance of growth finance in our current economy lies with one of IW Capital’s portfolio companies. Acclaimed currency exchange platform WeSwap had successfully set its foundations when we were introduced to them, with approximately 200 users and £20,000 worth of currency swapped per month. However this was a business that showed huge growth potential and was ready to take the next step; this investment opportunity caught our eye due to the experience that the management team conveyed and we knew that their proven enterprise concept of offering consumers the best rate possible would whet the appetite of our fintech hungry clients. IW Capital helped to facilitate investment of £3.5 million and since this successful round of funding WeSwap has grown rapidly and the platform now has more than 160,000 users and is swapping over £2 million a month.

A recent independent survey commissioned by private equity firm IW Capital discovered that more than a third (34%) of UK investors with over £100,000 in investments would consider investing in SMEs over the next five years but lack the knowledge of how to do so. In order to encourage and nurture private equity investment in the UK, it is vital that the industry bodies charged with guiding investors and SMEs focus on developing methods of increasing awareness and relevant education. Moreover, we need to ensure private investment is not saturated within the start-up community, but is instead dispersed into the next stage of growth – without this, sustainability will be difficult.

No one can deny the fast-moving marriage between alternative finance solutions and our nation of growing businesses. The sheer speed and scale of growth is in part, due to a fluid infrastructure that is not yet subject to the rigidity of corporate banking. Therefore, in a sector that is not yet aware of its own frontiers and possibilities, a huge responsibility lies with service providers and government to raise awareness amongst a collective of investors that are educated in steering SME progression forward safely.

In light of this, IW Capital and Crowdfinders have recently launched a new initiative called Race to Scale – a £100 million funding drive generating development finance that is solely dedicated to the UK’s scale-up community. The initiative has been launched in association with the UKBAA, Seedrs, SyndicateRoom, Smith & Williamson, Envestors, Crowdcube and international crowdfunding partner Invesdor – among others – in what is the largest partnered funding drive of its kind. The programme not only provides a portion of finance to ensure sustainable growth for UK scale-ups, but also looks to a more long-term solution by educating the investors that will ensure SMEs’ sustained financial stability. At a time when the very infrastructure of our private sector is changing at pace, it is imperative that the alternative finance industry evolves sensibly, prioritising long-term sustainability and growth alongside injections of capital into the infancy stage of start-ups.