While more than 40 per cent of businesses in the United Kingdom have accessed external finance this year, the economic impact could be far greater, the British Business Bank’s first annual Regions and Nations Tracker reveals. The problems begin with a lack of local investors and regional disparities in access to equity finance and private debt.
London, the Southeast, the Northwest and the East of England accounted for 86 per cent of equity investment and 69 per cent of private debt investment despite hosting just 55 per cent of UK businesses. By contrast, Yorkshire and the Humber accounts for just 1.5 per cent of equity investment and 4.9 per cent of private debt activity while hosting 7.2 per cent of the business population. London still dominates growth finance, accounting for 62 per cent of equity investment and 35 per cent of private debt investment despite only having 19 per cent of the UK’s SME population.
The authors state the UK’s uneven distribution of growth finance is not driven by a lack of high growth potential business in certain areas of the country but by the presence of local investors. Investors are far more likely to invest in businesses close to their office. In 82 per cent of equity investment stakes between 2011 and 2020, the investor and company are within two hours of each other whilst 61 per cent are within one hour of each other.
The preference for short distance deals has not been curtailed by the increase in remote working due to COVID-19, as the data shows only a slight uptick in the mean and median travel time in 2020. In more than half of investment stakes in 2020, the investor and company are within 30 minutes or less of each other, and on average within 70 minutes.
“The lower flows of finance in certain regions and localities reflect a population of businesses operating with fewer choices,” British Business Bank CEO Catherine Lewis La Torre said. “These gaps in growth finance are undoubtedly holding back ambitious entrepreneurs and lead to wasted economic potential. This is something the British Business Bank is committed to changing.”
The British Business Bank said it addresses these regional imbalances in access to external finance by providing strong support to businesses outside of London. Only 14 per cent are in London. Between 2020 and 2021, they invested £943m into businesses based outside of London, exceeding the original target of £868m.
The numbers were given a boost in the last half of 2020-21, which saw a £357m flow in total. Regional fund managers also successfully secured co-investment from other bank-delivered programmes, such as the Future Fund, to best support local companies.
The report stressed access to growth finance is particularly difficult for rural business owners who were more likely to resort to injecting personal funds into their businesses in 2020, especially in the construction sector. Roughly 38 per cent of rural construction business owners used personal funds compared to 27 per cent of their urban counterparts.
Investors with a local presence are critical to the success of UK equity ecosystems. The data shows a clear positive correlation between equity deals per high-growth business, and the strength of the local investor base.
Equity concentration is also strong. Taken together, the top 20 local authorities, which also include non-London hotspots such as Manchester, Bristol, Cardiff, and Newcastle upon Tyne, account for 58 per cent of all deals since 2011.cLondon, Scotland and the northeast of England fall within what the report calls the “self-contained” category due to the prevalence of the local investor base in equity transactions in companies within each geography. London is the most self-contained region, with 90 per cent of equity investors in London businesses also based in London, followed by Scotland at 81 per cent and the Northeast with 66 per cent.
Strong investment links were also identified between different parts of the UK. On average 60 per cent of investors into businesses in the East of England, Southeast, East Midlands and Southwest are based in London.