Venture capital and private equity in the UK

Written on 27 Jan 2016

Sector developments

Competition for the best assets remains fierce in both private equity and venture capital, driving up valuations.

In the private equity world, UK firms have plenty of dry powder and are under pressure to deploy their committed capital. Accordingly they are chasing investment opportunities alongside emerging sources of capital such as Asian and EMEA private equity and direct investments from pension funds. Experienced general partners have seen this before and are sensitive to the pressures to overpay – resulting in them looking to create value through more strategic acquisitions, for example through sector consolidation, and increasingly, buy and build strategies. Secondary buyouts have come to the fore as a preferred exit route for many houses, given the recent volatility of the public markets.

In venture, companies which have been able (or are perceived to have the potential) to leverage off the back of the tech revolution continue to be the most sought after investments. Large amounts of capital are being invested in the market leaders at staggering valuations as the fear of missing out takes hold. But whilst the media focus is on the unicorns, investments are also being made into less glamorous companies with a sound business plan. As public market exits look risky (with some high profile post-IPO tech market stock valuation declines), most VCs are eyeing an exit to a bigger player in the sector.

The changes to entrepreneurs’ relief qualification (abolishment on the Manco structures) early in 2015 caused a number of deals to stall and restructure but the market appears to have adjusted well and many deals still see structures designed to take advantage of both entrepreneurs’ relief and employee shareholder status (ESS) planning.

Regulatory developments

The regulatory environment has stabilised somewhat since the implementation of the Alternative Investment Fund Managers Directive and, in the UK, the industry has been dealing with a sympathetic government. Nevertheless, there have been a number of proposals targeting the asset management industry which have had an impact on the fringes of private equity and venture capital. We are keeping a watching brief on these as they track through the legislative process, most recently a proposal to restrict the availability of capital tax treatment for carried interest which could negatively impact short-term investments, and another to restrict the tax deductibility of interest payments.

UK firms and investors in UK companies will need to prepare for a new UK law being implemented in April 2016 which will require every UK company and limited liability partnership to keep a public record of its beneficial owners – to be known as “the people with significant control (PSC) register“. An exemption to the law, proposed by the UK industry group (the British Venture Capital Association, BVCA) will mean that passive investors in funds will normally not need to be disclosed. But nevertheless careful analysis will be needed when the final rules are published by the Government (most likely in February 2016).

Outlook for 2016

The upward valuation trend is likely to continue in 2016 but will be sensitive to the macro-economic outlook: the impact of commodity/oil prices, possible Brexit and China’s slowdown are all likely to be felt. The digital business sector – particularly cyber security, FinTech, gaming and m-commerce – will continue to be most attractive to venture funding.

Key deals in 2015

The UK market in 2015 saw healthy deal flow in both private equity and venture capital.

In the UK, Osborne Clarke acted on 57 VC / growth equity rounds, with an aggregate deal value (amount raised) of over £660 million. Key deals included advising:

  • Funding Circle on its $150 million series E round.
  • Google Ventures (GV) on its $20 million series C investment in Kobalt (part of a $60 million round).
  • Lendinvest on its £22 million series A round investment from Beijing Kunlun, a Chinese-listed technology company.
  • Multiple investments for investors such as Imperial Innovations and Highland Europe. 

On the private equity side, in the UK, Osborne Clarke acted on 33 deals with an aggregate deal value of over £2 billion. Key deals in included advising:

  • Caledonia Investments plc on its £250 million acquisition of the Gala Retail Bingo business from Gala Coral.
  • Management of leading compliance software and certification group, Alcums, on its £92 million secondary buyout funded by Inflexion Partners and subsequent bolt on acquisition of Santia Consulting.
  • Management on the acquisition of LA Fitness by Pure Gym.
  • Alcuin Capital Partners on the management buyout of The Groucho Club Limited.
  • Growth Capital Partners on the sale of leading travel company Iglu.com to LDC.
  • Multiple deals for houses such as Synova Capital, Bridges Ventures, Risk Capital Partners, NVM Private Equity and RJD Partners,