David Wighton is a columnist for Financial News
The gloom surrounding Britain’s economy is so pervasive that even the rare seemingly good news is grimly scrutinized for evidence that it is actually bad.
One of the most striking achievements of the UK economy in recent years has been the extraordinary growth in venture capital investment. That’s almost reached US levels, according to my calculations using PitchBook figures for the past five quarters and adjusting for the size of the economy.
Even so, however, the Eeyores find something to worry about. One concern, they say, is that an increasing proportion of investment is coming from abroad, particularly from the US. Supposedly, this means that venture-backed companies are more likely to be bought by foreign companies or listed on foreign stock exchanges.
Some politicians and investors in the UK seem convinced that this is true and the government’s British Business Bank has just produced a series of figures that seem to back it up. The BBB found that between 2011 and 2021, 44% of all equity-backed company exits occurred overseas. Of the companies that were only financed by national investors, 40% went abroad; however, this increased to 61% for companies previously funded by a foreign investor.
While the BBB makes a good play of this in its latest report, it admits it “doesn’t prove causation” and admitted to me that “we would expect companies with the greatest market potential to be more likely to be funded by investors foreign and also to be more likely to go abroad because of access to these larger markets.” So there may be no causal link.
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Certainly, some experts are skeptical. Luisa Alemany, an associate professor at the London Business School specializing in entrepreneurial finance, believes that in continental Europe, companies funded by domestic investors may be more likely to seek domestic exits.
But he doubts the same will happen in the UK, where domestic investors will face fewer cultural and other barriers to selling a company to a US buyer or listing it on a US stock exchange.
Even in the case of other European countries, there is little academic evidence to support the BBB idea. In 2019, Thomas Hellmann, a professor at Oxford’s Saïd Business School, published an article analyzing the economic impact of American venture capital in Sweden. The figures suggested that the presence of US venture capital investors did not increase the likelihood of exiting the US. Admittedly, Hellmann found this “most surprising” and is doing more work that may lead to a different conclusion.
Another potential concern about the growing role of US venture capital money is what happens in a market downturn. Will it be like the financial crisis of 2008 when US banks pulled back on UK lending to focus their resources on their home market?
Well, we’re about to find out. Some US venture capital funds operating in the UK say they have turned off the taps here faster than their European counterparts, although US venture capital investment figures in recent months suggest that they have been reduced to home with the same force.
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Whether the nationality of investors matters in the fight over the planned flotation of Arm Holdings, the UK-based chip design group. The government has been trying to persuade its Japanese owner, SoftBank, to remarket Arm in London instead of the US. It has even reportedly considered using the new Homeland Security and Investment Act to force her to choose the UK.
It would obviously be great for the city and the UK’s wider reputation as a tech leader if the government succeeds. But invoking the new law would be strange.
Presumably, the argument would be that if Arm traded in New York rather than London, it would be more likely to fall prey to a US takeover. But is it really believable that having a higher proportion of US shareholders (as would be the case if you listed in New York) would make much of a difference? After all, being listed in London (with many American shareholders) didn’t stop SoftBank from acquiring it in the first place. And in any case, the government could still use the new law to block a takeover on national security grounds.
A final rather thin argument for worrying about international investment in UK companies is that it means value is lost for overseas investors.
“U.S. institutional investors are the ones who are really piling up the value,” Dom Hallas, head of startup advocacy group Coadec, said in a recent Bloomberg article, citing Arrival, Babylon Holdings and Cazoo as examples of ‘promising UK companies that had opted to float in the US.
Given that all three have fallen more than 90% from their IPO prices, UK investors may not be too unhappy about missing out on these opportunities to the Americans.
To contact the author of this story with comments or news, please email David Wighton