Venture capital (VC) funds have poured £6.9bn into UK scale-ups in the first quarter of the year, completing 745 deals, but ongoing uncertainty in the economy is set to slow down the pace of dealmaking, according to a new survey.
KPMG’s Global Venture Pulse survey, published today, found that a rise in corporate backed venture capital, private equity funds searching for better returns and an increased focus on early-stage investing has powered UK’s VC market in the first three months of the year.
“Despite concerns around the uncertainty in the economy, and with interest rates rising, the UK continues to demonstrate resilience and adaptability in attracting VC investment and is the jewel in the crown for innovation in Europe,” said Warren Middleton, lead partner for KPMG’s Emerging Giant Centre of Excellence.
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The bulk of the £6.9bn went into London-based scale-ups, including the $1bn (£797m) raised by payments group Checkout.com., with the rest of the UK attracting £1.7bn, according to the data compiled by PitchBook. However, KPMG Venture Pulse figures from 2021 show that VC investment in scaleups based outside of London has been accelerating and hit £8.1bn at the end of 2021, up 145 per cent since 2019.
Middleton said fintech, business-to-business focused services and healthtech were the top areas of investment, although interest in cybersecurity and defence also grew considerably over the period.
“Fintech remains a very hot area of investment as the payments space has continued to grow. Buy-now-pay-later (BNPL) has become very attractive in the eyes of investors – not only direct BNPL companies but also other businesses diversifying into offering BNPL options,” he added. “Recently, the FCA announced its intent to regulate the space in the near future, which could drive consolidation in the space moving forward.”
Meanwhile, corporate venture capital investment accelerated over the period, accounting for £3.4bn of the total deal value.
“Given some of the geopolitical and macroeconomic uncertainties at the moment, we are seeing deal speed starting to slow as VC investors conduct more due diligence related to potential deals,” Jonathan Boyers, UK head of corporate finance at KPMG said.
Funds are also expected to turn their attention to more late-stage deals, in an effort to de-risk their portfolio.
Although capital continued to flow into scale-ups, there has been less activity in the exit markets, due to the significant level of uncertainty in the markets.
There were only 56 exits in the first quarter of the year, worth £2.8bn, down from 68 deals that raised £11.9bn in over the same period in 2021.
“The closure of the IPO window could drive interest back to traditional M&A and the downward pressure on valuations could mean companies taking a wait-and-see approach with the hope that valuations bounce back,” Boyers added.