Sunday Sitdown: Investors look past political changes as Brexit offers a chance to alter investment regulation, says City veteran
More than 440 firms in banking and financial services have relocated part of their business, moved employees or set up new entities in the EU following Brexit.
Dublin and Paris are the go-to destinations, as banks have moved or plan to move more than £900bn in assets to the EU, equivalent to 10 per cent of the entire UK banking system.
While these figures make for sobering reading and reveal the extent of just how much Brexit will change the face of London as a finance hub, Morning Wire sits down with Square Mile veteran David Hall, for nearly two decades the managing director of private equity firm YFM, based in Mayfair.
As chair of the firm’s investment committee, Hall is responsible for raising fresh funds and the management of dozens of investments. He is also chairman of City-based industry group VCTA.
Hall is convinced investors look past political changes and are still interested in British businesses. Moreover, he said Brexit provides the City with an opportunity to alter the investment regulation for the better.
Despite Brexit, Canada was, and many argue still is, the beating heart of Europe’s banking and investment community, and Old Street the Silicon Valley of Europe. Do you expect that to change long-term in the post-Brexit era?
As the son of a butcher from Salford, I hope Brexit will accelerate the levelling up agenda, building a vibrant environment across the country that is conducive to small business growth and focuses on nurturing regional talent and clusters. But we need to ensure that regional hubs feed off the capital’s success rather than be starved by it.
Also consider the positives, Brexit will open up new ways of trading that are more efficient. Deals will make it easier to exchange goods and services with markets such as the US and Singapore.
I do think that London will remain the heart of the ecosystem, given the majority of fast-growth companies and funding is based there
Just as Silicon Valley was an idea by the US government which has spawned something wildly successful, creating clusters in the UK will also be vital to spreading scale-up innovation and funding across the country. It will help to maintain nationwide enthusiasm for entrepreneurship and incentivise founders to give back to their local ecosystems.
Has Brexit slowed foreign investors’ appetite to pump equity into British businesses?
We are still seeing high demand from overseas investors for fast growth companies. It is just more centred around emerging industries or those that have done particularly well in the pandemic, such as e-commerce, collaboration tech and cybersecurity. In particular, there is a lot of cash to invest in mid-market companies.
Many will look past political changes and not be put off investing in organisations based here
Despite Brexit, overseas investors still know that the UK is producing some of the most innovative companies in the world. In fact, some European investors will consider having a UK footprint more important than ever. post-Brexit. This desire will only grow if the pound continues to increase in value as it has done over the last couple of months.
Culturally too, a previous issue for overseas investment was how to meet potential portfolio companies and build face to face relationships with them before making any decisions, [but] it is becoming increasingly acceptable for deals to go ahead without an in-person meeting.
Apart from fundraising, how has the Brexit deal impacted businesses across different industries, depending on whether they deal in goods or services and software?
In the short term, there will be lots of extra paperwork for all businesses, particularly those reliant on the movement of physical goods. However, this particular problem isn’t going to impact the majority of fast-growth startups, many of which are in the tech sector.
Businesses in the software and services space are going to be primarily impacted by issues around data adequacy, and how such regulatory changes, and the associated red tape, will impact their operations.
Damage can still be caused, and we need to avoid this as it will take a long time to recover.
There’s a priority to sort out the operation of the financial services sector, where there will be a leakage of jobs from the UK until there’s clarity regarding our trading relationship. I’d caution against those suggesting that as the numbers are currently not as stark as some of the gloomier prediction, that its not a real problem.
On a longer-term basis, Brexit could well impact the UK’s talent pipeline, as our ability to hire European nationals may be compromised. It’s going to be important to overcome this problem quickly, whether through special visas or other agreements with the EU to ensure innovative businesses have access to skilled workers. If there is a choice between New York and London and it’s harder to come here, you can see the issues that may arise.
Let’s move on to the pandemic as funding has been decreasing since March of last year. This places limitations on the volume of investment. How challenging is it to raise funds, currently?
Fundraising for investors actually looks relatively steady, despite the seismic waves the pandemic has sent across the world. However, demand for funding hasn’t decreased and this is where we’ll probably start seeing pinch points, particularly as scale-ups seek VC capital to reduce their debt and fuel growth. Although investment has remained fairly consistent, we might see a growth capital gap should the number of companies seeking funding outweigh the amount that VCs can invest.
I take it the National Security Bill is making life not any easier for you ?
Surprisingly, the National Security Bill has not had a significant impact, yet. Although there might be some transaction friction in the short term as the adjustments are made, in the long run, we’ll build the new legislation into the deal timetable, so it will just become another piece of due diligence that needs ticking off the list. Buyers are just going to need to become aware of the process and work it into their plans.
What changes should the government make to the UK funding infrastructure for small businesses, in order to generate greater opportunities for domestic or foreign investment?
The challenges from Brexit aside, the political shift has provided us with an opportunity to alter investment regulation by making our own State Aid rules. Before the 1st of January, government-backed funding schemes such as VCTs had to comply with EU rules on State Aid. This meant the government was not allowed to provide financial support beyond certain limits because income tax relief is regarded as State Aid.
These rules originated in Brussels and were designed for a multi-national trading bloc and not a single nation like the UK. This is especially pertinent now as the UK has its own priorities, including fuelling its thriving startup environment, with the government trying to provide greater than usual support to the country’s struggling small businesses.
Can you elaborate?
Yes, this is because the law places limits on the amount of funding a company can raise over their lifetime from government-incentivised schemes. There are also age limits in place in terms of how young a business has to be to qualify for government-subsidised schemes, which restrict the range of businesses that can benefit from public-private investment schemes.
Just like people, age should not be a barrier to a company’s ability to grow and innovate.
Often businesses reach these limits before they are ready for new, bigger funders to come in and take them to the next stage of the investment pathway. If we use Brexit as an opportunity to relax these limits, it would enable the government, and its co-investors, to better support businesses and provide them with the capital required to scale.
Ultimately, developing a world-class funding infrastructure for growth businesses means creating a holistic investment pathway that both creates the global unicorns that grab the headlines and feeds capital to the broader pipeline of small businesses that contribute to job creation and regional growth.
Everyone has something to say about ‘impact’ investing these days. It has become the go-to buzzword for corporate firms and investment platforms. What do you make of that?
The rise of impact investment is a positive long-term development. What is encouraging to see is that over the last 5-10 years, the phrase ‘impact’ has gone from “something that we need to incorporate in a paragraph in the chairman’s report” to an activity where data is proactively being collected and analysed so companies can take tangible action on how they can make a fairer and better impact.
While this is a step in the right direction, there is a long way to go. It’s good that the impact of an organisation on the local community and environment is being considered and becoming a focus in an organisation’s larger strategic goals, and I’m sure this will only increase over the coming years.