How institutional investment and crowdfunding are dominating the growth capital market and making individual investors a distinct minority

 
Jonathan Garbett
(FILES) A picture taken 17 April 2007 in...
Crowdfunding continues to claim its place in capital fundraising, which is good news for SMEs and entrepreneurs (Source: Getty)

In the first quarter of this year we saw strong activity in growth capital raising with institutional investment, including crowdfunding, dominating over direct investment.

This is largely due to the increasing sophistication and specialisation of institutions in providing growth capital, coupled with the increasing activity of crowdfunding platform operators over the last few years.

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The results suggest that institutions are providing more of the funds than before in the £1m to £15m range, with 71 per cent of the total versus 65 per cent in the first quarter 2015 and 64 per cent for the whole of 2015.

This demonstrates that there were more deals at the top end of the range in this period and that the institutions are orchestrating bigger deals.

Individuals appear to struggle to participate at the higher end of the range, as opposed to the institutional community for whom the size of ‘cheques’ are deemed to be very modest.

This situation isn’t likely to change any time soon with individual investors becoming a distinct minority.

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Crowdfunding continues to claim its place in capital fundraising, which is good news for SMEs and entrepreneurs. While crowdfunding deals have been criticised for the quality of the investment product, in particular valuation and due diligence, we believe that crowdfunding is a permanent part of the financial landscape.

Experience has shown how these deals have achieved higher valuations than other parts of the market in terms of multiples of revenue achieved, which is why we consider it to be an attractive funding option, but as with all deals there is always the risk of valuations proving to be unjustifiable in the longer term.

This phenomenon will no doubt correct itself over time with improved due diligence and quality control processes; in any event, being mitigated by the outperformance of some companies and even higher multiples achieved on exit by others.

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Crowdfunding will continue to blaze a trail across 2016, following on from its stellar levels of activity in 2015 where funding sizes topped £1m in many transactions.

We can also expect to see further innovation, with institutions and crowdfunding investors fundraising in collaboration.

This will be an interesting way to meet the challenges in respect of how the valuation is arrived at from an investor perspective as well as the potential for an investing party to lead the due diligence process.

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Growth capital funding will continue to be a hot agenda item in the year ahead for institutions, particularly in the areas of online technology and key sectors such as biotech and fintech.

Building on the theme of innovation, we can anticipate increased activity with large corporates providing funds to smaller private companies in exchange for a minority stake.

Based on first quarter activity levels, opportunities abound in 2016, with tech sector growth a priority for many investors; strongly supported by the UK’s reputation for cultivating and enhancing entrepreneurial success.

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