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Is foreign investment propping up British unicorns?

04 August 2017|by Beauhurst

In The Deal for H1 2017, we noticed with interest that while UK investment into high-growth companies is more or less stagnant, the same cannot be said of investment from abroad. What does this mean for the UK, and will foreign investment have positive or negative consequences for its herd of unicorns?

foreign investment.pngThe graph shows a slow but steady increase of investment from funds headquartered outside the UK. Below, we've looked at this trend in more detail: are foreign investors dribbling small amounts of capital into high-growth UK firms, or are we instead seeing large swathes of foreign cash feeding UK unicorns, in the absence of sufficient domestic resource?

foreign-investment-brackets.png

The answer is, broadly, yes to the latter. More deals at the top end of the scale (£20m+) are funded by non-UK investors than by UK funds, which congregate disproportionately at the lower end of the scale (deals between £0-5m). 

It would be easy (and perhaps natural) to associate this effect with Brexit – either positively or negatively; Brexit could have reduced the capacity/appetite of domestic funds to invest, or it could have made the UK a more attractive place for foreign investors to hold assets. But as our first graph shows, the increase in foreign investment began in the second half of 2015, at which point Brexit was virtually unheard-of:


This suggests a phenomenon with broader causes than one referendum. Nonetheless, the question of whether the UK's departure from the EU will affect investment, particularly in rapidly scaling companies, is an important one. Some commentators have queried whether the UK's unicorn herd will survive in the absence of capital from the European Investment Fund, which invests in many UK funds and as such provides larger pools of cash on which they can draw.

There are nine UK unicorns identified by Beauhurst, and of the 71 funds which backed them, 13% are recipients of EIF funding. The unicorns have raised £1.98bn between them, of which EIF-backed funds contributed to rounds worth £271.7m, meaning that EIF-backed funds contributed to 13.7% of the total amount invested in these high-growth companies. This is not an insignificant proportion by any means, though it is not possible to draw firm conclusions from a sample of just nine companies.

The relatively small size of the figure may nonetheless provide some reassurance that the future of UK unicorns is not entirely gloomy in the wake of Brexit. Coupled with the rise of foreign investment – China and Japan have both participated in unicorn deals recently, with FarFetch and Improbable respectively – it seems that there may yet be cause for optimism about UK unicorns.

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