By Neil Debenham, CEO of Fintrex
Private equity seems to be an industry marred with controversy. In recent months, coverage around prominent merger and takeover deals has proven to be overwhelmingly negative. Private equity firms have been presented as exploitative and aggressive entities, taking advantage of companies at risk of falling into administration due to the challenges by the COVID pandemic and the recognition of the support that fresh investment in forms of both equity or debt can bring is quite heavily being portrayed as vulture funding.
Whilst it is true that private equity is taking advantage of current market conditions, that narrative has essentially overshadowed the importance of private equity, and indeed debt finance, as a catalyst for business scale-up and growth.
Since the announcement of the first lockdown in March 2020, debt investment has been able to support companies that simply do not have enough cash reserves while maintaining a healthy balance of operating capital. What is more, venture capital and private equity investors collectively raised £12 billion of investment for start-ups and scale-ups over the course of last year.
The point here is that without private equity and debt investment, the disruption caused by the pandemic would have been much more severe. As the country continues to transition out of lockdown, these same investment tools will be vital in helping established businesses adapt to the new normal while also serving the needs of startups in need of scale-up capital.
Alternative finance has become integral to business growth
Alternative forms of investment first rose to prominence in the aftermath of the global financial crisis. To reduce their risk exposure and display an element of composure after government bailouts, mainstream financial institutions adhered to strict lending measures which made it extremely difficult for businesses to access finance. In response, debt and private equity and venture capital funds positioned themselves as alternative investment vehicles, connecting companies in need of finance with investors keen to back British businesses.
2015 was a record-breaking year for startup formation in the UK. According to Companies House, it was estimated that over 600,000 new businesses were created that year – a reflection of the UK’s position as a global hub for innovation, entrepreneurship, and private sector growth.
The ensuing years were equally positive. A significant number of startups were making that effective transition into successful scale-up businesses, sparking the rise of a new generation of investors.
Part of this can be linked to the public and private support structures currently in place. From accelerator programmes to incubator hubs and government-backed schemes, entrepreneurs can access different initiatives depending on the stage they have reached in their business cycle.
From my perspective, however, alternative investment established itself as a catalyst for business growth. Private equity and debt investment, facilitated through private investment houses, family-offices or peer-to-peer platforms, has ensured companies have access to growth capital difficult to secure from traditional financial sources.
The University of Cambridge’s pivotal report on alternative finance, released in 2016, revealed how vital these funding instruments have become for SMEs. The report estimated that around £2.2 billion of business finance was raised through online, alternative finance platforms. The result was the provision of venture, working, growth and expansion capital for approximately 200,000 SMEs.
In the last five years, £43 billion has been invested in more than 3,230 UK companies by private equity and venture capital funds in the UK. If anything, the pandemic has only strengthened the importance of alternative finance for private sector organisations.