Why West Coast funds love investing in the UK

Catching up over the past couple of weeks with a range of the funds we deal with out here on the West Coast, one message comes over consistently: they love investing into the UK. In our Trans-Atlantic Transactors report on US PE houses, we highlighted factors including the shared language, the strength of London's financial markets, and its depth and breadth of advisory talent and expertise. But those aren't the only reasons.

Structural Shortage of UK Growth Equity

For growth equity investors (as opposed to buy-out/majority control PE houses), the principal opportunity they have identified is one of market structure - a shortage of domestic growth equity investors, meaning lower levels of competition for great deals. 

The Growth Mindset

UK private equity houses have historically been focused on majority-control management buyouts into more-or-less well established business with strong growth prospects.

The West Coast VC mindset is different; it doesn't need majority ownership, or even necessarily a well-established business. It's all about the growth opportunity , how large is it, and how quickly can it be tackled if capital is no longer the constraint.

New Entrants but Little Fundamental Change

US funds aren't the only ones to have noticed. The UK landscape for growth equity has been evolving over the past few years as a number of investors have turned their attentions to development capital rather than change-of-ownership transactions.

The launch of the Business Growth Fund in 2011 brought a very significant volume of capital in to this previously under-served segment, and for a while the BGF had this part of the market largely to itself. Inflexion's £500m growth equity fund came next, then the changes to the VCT tax rules which saw investors deploying VCT funds switch from buyout structures to development capital transactions. And banks and debt funds have pushed into this segment too, offering new loan structures, growth debt and venture debt for those companies which can support its cash-flow profile.

Quality and Quantity

But UK-based management teams still have many fewer growth equity options than their US counterparts, and fewer examples of each type of investor.

This more benign competitive environment for investors, and the perception that they bring a differentiated approach as well as the promise of support for US market entry, means North American growth equity investors expect to win more than their fair share of opportunities in the UK and Europe more broadly.

A Genuine Win/Win

This has real benefit for UK-based sellers and management teams, as US investors, reassured they are facing less competition than they would back home, often find they can offer more generous terms to sellers and management teams than their domestic rivals, while doing better deals than they might be able to in North America , creating a genuine win/win situation.

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