The Small Business Equity Tracker 2021, a report published by the British Business Bank shows the UK small business sector received £8.8bn in equity investment in 2020 – the highest annual amount since 2011 when the data series began, despite the impact of the COVID-19 pandemic.

The high levels of equity investment have continued into 2021, with total investment value in the sector reaching £4.5bn in Q1, the highest amount ever recorded in a single quarter, highlighting returning investor confidence in both the UK’s smaller businesses, and the country’s wider economic recovery.

Regional programmes supporting increased equity investment in the East Midlands

The East Midlands region secured £76m (2%) of total UK equity investment, a 167% increase on the £29m invested in 2019. The British Business Bank also backed 10% of equity deals in the East and West Midlands in 2020, as part of their move to improve regional imbalances in terms of access to finance.

This move has been driven by increased activity from the Bank’s range of equity programmes, including the Midlands Engine Investment Fund (MEIF). In 2020 the share of MEIF-supported equity deals increased to 25%, from 20% in 2019, with the fund providing finance to over 350 smaller businesses in the wider Midlands region.

Investment levels varied by industry

Levels of equity investment varied widely by industry in 2020 due to the varying impacts of the pandemic.

The tech sector in particular witnessed a significant increase in M&A deals in Q1 2021, fuelled by heightened investor appetite, as more companies turned to digitisation to implement innovative technological solutions, and deals within the sector accounted for almost half (46%) of the total equity investment in smaller UK businesses in 2020,

Software companies in particular benefitted from an increase in remote working, with corresponding valuations increasing as a result. Within the tech sector, software businesses received the largest share of deals worth £2.5bn.

On the other hand, industries most affected by Government restrictions sectors such as retail, leisure and entertainment and personal services received less investment, with investment falling by 36% in the leisure and entertainment sectors.

Rapid growth in deep tech equity investment

A key contributing factor to the growth of UK equity finance has been increasing investment in deep tech companies, which has been growing rapidly over the past 5 years. Investment has risen 291% to £2.3bn in 2020, with the number of deals in the industry also rising by 78% in the same period.

Deep tech companies are founded on scientific discoveries, and focus on the development of new ground-breaking technology, covering a range of different areas such as quantum computing, AI and clean tech. Due to their complex nature and large amounts of financing required, alongside long development times, deep tech companies can struggle to source funding.

Despite this, investor interest in the industry is on the rise, due to advances in technology which have increased the commercial viability of deep tech, alongside increased demand for technology that addresses global challenges such as climate change.

Increased investment is key to unlocking growth

In light of the report Dan Bowtell, Corporate Finance Partner comments:

“The record-breaking levels of investment set out in this report are a clear sign that investor confidence in the UK’s smaller business is not only returning, but growing rapidly”.

“This is a positive sign for the many innovative smaller businesses, on both a local and national scale who need funding in order to grow and develop, particularly those who will still be feeling the financial effects of the past year”.

“It is interesting, but perhaps not surprising to see such a marked increase in investor interest in deep tech, which is testament to the quality of pioneering companies we have here in the UK. I hope this is a trend that continues, in order to provide these UK businesses, many of which are start-ups, with the opportunity to scale up and compete on an international platform, enhancing the UK’s reputation for innovation in science and engineering”.

Smith Cooper Corporate Finance specialise in deals involving equity investment, and our partner-led team can help you navigate this market to support your funding needs. Please do not hesitate to get in touch today.