Investment flow

Archangels uptick heralds hope amid deals slowdown

David Ovens
David Ovens: outlook remains unchanged

A year of steady but unspectacular growth lies ahead for Scottish investment amid hopes that lower interest rates and more corporate tax cuts will re-ignite deals activity following a global slowdown in 2023.

Scottish deal flow has been largely flat over the past year and the broad outlook for 2024 is for more of the same, according to dealmakers and economists.

New figures published today by Edinburgh-based investment syndicate, Archangels, support the cautious outlook. It invested £13.8m during 2023 in eleven early-stage tech and life science companies, a similar level to 2022 (£13.4m).

Archangels bolstered its funding fire power through a £12m co-investment agreement with British Business Investments via its Regional Angels Programme, one of a number of new initiatives announced by institutions aimed at stimulating investment.

David Ovens, joint managing director at Archangels, said: “We started 2023 knowing that we faced a difficult macro-economic and geopolitical environment, and that proved to be the case.

“The outlook for 2024 remains relatively unchanged from this year”.

Among corporate lawyers, Anderson Strathern was among the most positive, last week saying it advised on the highest level of investment deals by value for the second year running. Partner Euan Tripp said the firm had noticed that “the sums being invested in Scottish companies have generally increased over the past year.”

He added: “We have many clients looking for new opportunities to invest, especially in young companies with exciting ideas in similar areas that dominated the 2023 investment market.”

This upbeat message contrasted with a generally reported 12 months of steady or weaker activity and a more cautious approach to the coming year.

Peter Lawson at Burness Paull said in the late summer that to “increase turnover and largely maintain profitability in the context of a quieter property and M&A market is a good outcome.” He said he was “optimistic but not complacent” about the outlook.

Since then the economy has weakened and revised figures show the UK economy contracted in the last quarter. Earlier this month the Addleshaw Goddard Scottish Business Monitor reported that nearly half of firms in Scotland have cancelled or delayed planned investments in the past 12 months, with indications that this mood will remain until there are sufficient signals that demand is returning.

Laura Falls, partner in the corporate team at Addleshaw Goddard in Scotland, said: “Businesses are still largely focused on funding investment through their own means, rather than what they may see as the risk involved with seeking external backing.”

KPMG reported that venture capital investment in the first nine months of 2023 saw deals valued at just £335m, well down on the same periods for 2021 (£529m) and 2022 (£623m), when the market was unusually busy following the pandemic.

Graeme Williams, head of corporate finance M&A for Scotland at KPMG UK, said the time taken to complete VC deals had “slowed considerably across most regions of the world this year”.

He added: “Investors are adopting a more cautious approach, conducting additional levels of due diligence, and seeking companies with well-defined paths to profitability.”

The next wave of investment will be supplemented by a new £150m fund from the British Business Bank while Scottish VC fund, Par Equity, launched a £100m northern start-up fund, and Foresight announced a £60m fund.

These, however, are generally targeted at the early stage market and there is a growing concern that the mid-sized sector is feeling the squeeze. These are the vital “scale-up” businesses which are poorly represented in Scotland and, according to some observers, are being denied the required level of risk capital.

Already there is a shortage of private capital into these companies and with the Scottish National Investment Bank and Scottish Enterprise suffering cuts to their budgets there will be some alarm that this funding support will weaken further.

On the direction of the economy, the Bank of England is expected to play a pivotal role in whether it tips into recession or is given a lift through early cuts in interest rates following a steeper-than-forecast fall in inflation.

The Chancellor is also looking to ease the tax burden and offer help to the housing sector as conditions improve and as part of a general election strategy.

An improving energy price market is providing further grounds for optimism. According to the Office for National Statistics, gas prices fell 31% in the year to November. Lower costs will be key to improving profitability and confidence.

In a survey by Bank of Scotland almost half (49%) of respondents expect to hire more staff in the New Year.

With the expectation of inflation continuing to fall, more than two thirds (68%) are confident that they will see their business become more profitable in 2024 compared to 2023.

Data on Friday showed that retail sales rose in November at the fastest pace since the start of the year. The quantity of goods sold increased by 1.3% on the previous month compared with estimates of 0.4%.

 



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