The South West is lagging behind other regions when it comes to opportunities for growth finance, a new report has revealed.
The British Business Bank’s first annual Regions and Nations Tracker, published today, explores the geographic patterns seen in UK smaller business finance. It reveals that more than four in ten businesses in the UK were using external finance in 2021, but a lack of local investors means economic potential continues to be wasted across the UK’s regions and nations.
Regional disparities persist particularly in access to equity finance and private debt, the report finds.
Despite hosting 9% of UK smaller businesses, the South West accounts for just 4% of all UK equity deals and 7% of private debt activity in the UK, according to the report. London, the South East, the North West and the East of England accounted for 86% of equity investment and 69% of private debt investment despite hosting just 55% of UK businesses.
London still dominates growth finance, the report finds, accounting for 62% of equity investment and 35% of private debt investment despite only having 19% of the UK’s SME population.
Moreover, in only 37% of equity investment stakes in the South West between 2011 and 2020, the investor and company were based within two hours of each other - in stark contrast to the UK average of 82%. Around 60% of investors into South West businesses are themselves based in London.
The report finds that business owners in rural areas of the UK like the South West are more likely to inject personal funds into their business than urban entrepreneurs because of a lack of growth finance option, while businesses in Bristol are the biggest beneficiaries of equity investment in the region, making up 39% of South West recipient businesses.
Core debt products including overdrafts, loans and credit cards are the most used forms of business finance in all regions and nations of the UK, but equity finance and private debt can support companies with the potential for rapid growth.
Investors favour short distance deals
The UK’s uneven distribution of growth finance is not driven by a lack of high growth potential business in certain areas of the country but by the presence of local investors. Investors are far more likely to invest in businesses close to their office – in 82% of equity investment stakes between 2011 and 2020, the investor and company are within two hours of each other; 61% are within one hour of each other.
The preference for short distance deals has not been impacted by the increase in remote working due to Covid-19, the data shows only a slight uptick in the mean and median travel time in 2020. In over half of investment stakes in 2020, the investor and company are within 30 minutes or less of each other, and on average within 70 minutes
Catherine Lewis La Torre, CEO of British Business Bank, said: “The lower flows of finance in certain regions and localities reflect a population of businesses operating with fewer choices. These gaps in growth finance are undoubtedly holding back ambitious entrepreneurs and lead to wasted economic potential. This is something the British Business Bank is committed to changing.”
The British Business Bank’s commitment to address regional imbalances
The Bank remains committed to addressing regional imbalances in access to external finance. 86% of businesses supported by British Business Bank’s programmes are based outside of London.
Between 2020 and 2021, the Bank invested £943m into businesses based outside of London (exceeding its original target of £868m).
Across its Regional funds, record deployment was recorded this year principally due to a strong second half of 2020/21, providing a £357m flow of finance into regional finance markets in 2020/21.
Regional fund managers also successfully secured co-investment from other Bank-delivered programmes, such as the Future Fund, to best support local companies.
Rural business owners more pressed into injecting personal funds
Access to growth finance is particularly difficult for rural business owners who were more likely to resort to injecting personal funds into their businesses in 2020, especially in the construction sector. The report found 38% of rural construction business owners used personal funds compared to 27% of their urban counterparts.
The report argues that investors with a local presence are critical to the success of UK equity ecosystems. The data shows a clear positive correlation between equity deals per high-growth business, and the strength of the local investor base.
Uneven spread of equity finance across the UK
The report reveals a striking degree of concentration in equity activity. Taken together, the top 20 local authorities, which also include non-London hotspots such as Manchester, Bristol, Cardiff, and Newcastle upon Tyne, account for 58% of all deals since 2011.
London, Scotland and the North East of England fall within what the report calls the “self-contained” category due to the prevalence of the local investor base in equity transactions in companies within each geography. London is the most self-contained region, with 90% of equity investors in London businesses also based in London, followed by Scotland at 81% and the North East with 66%.
Strong investment links were also identified between different parts of the UK. On average 60% of investors into businesses in the East of England, South East, East Midlands and South West are based in London.
The Regions and Nations Tracker 2021 report is available to download from the British Business Bank website.