The first annual Regions and Nations Tracker published by the British Business Bank has revealed alarming regional disparities in accessing equity finance and private debt in the UK.
Although more than 40% of businesses were accessing external finance in 2021, the lack of local investors in certain areas means that there are lost economic opportunities across the UKs regions and nations.
Throughout the UK, loans, credit cards and overdrafts are the most common types of business finance, especially for smaller businesses. Equity finance and private debt on the other hand can support businesses that have been identified as having the capability for accelerated growth.
Four regions account for the majority of investment
Findings from the report indicated that London, the South East, the North West and the East of England amounted to 86% of the total of equity investment in the UK and 69% of private debt investment even though these regions were home to just 55% of UK businesses.
At the other end of the scale is Yorkshire and Humber which accounts for only 1.5% of equity investment and 4.9% of private debt investment yet hosts 7.2% of the UK business population. London, unsurprisingly, accounts for 62% of equity investment and 35% of private debt activity, although it is home to only 19% of SMEs in the UK. Business owners based in rural areas are more likely to use personal funds than their counterparts in the major cities because there is a shortage of growth finance options available.
Investors don’t travel far
This geographic disparity in growth finance activity is not caused by a shortage of businesses with potential for rapid growth in certain parts of the UK but by a lack of local investors. The report indicates that investors tend to work with businesses that are close to where they are based. Between 2011 and 2020, 61% of equity investment deals were made amongst investors and companies within a one hour distance of each other and 82% were within a two hour journey. More than half of investment stakes in 2020 were between investors and companies based within 30 minutes of each other. The increase in remote working as a result of the recent lockdowns only had a negligible effect on these results.
London, along with the North East of England and Scotland come under the ‘self-contained’ category due to the strength of the local investor base in equity transactions within their respective business communities. With 90% of equity investors in London based in the capital, London is the most self-contained region, followed by Scotland with 81% and the North West with 66%.
The CEO of British Business Bank, Catherine Lewis La Torre, 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 are keen to emphasise that they are not London centric and 86% of businesses they supported between 2020 and 2021 reside outside of the capital. This amounted to a total of £943 million, while £357 million was deployed into regional finance markets during 2020/21.
Shortage of local investors
The report continues by stating that local investors are imperative to address the regional disparity and to the success of the UK equity ecosystems. The findings prove there is a direct link between the strength of the local investor base and the number of equity deals for growth businesses.
Out of the top 10 local authorities where most equity activity has taken place only two are from the north: Edinburgh at number six and Manchester in ninth position. In fact, seven of the top 10 are in London. To highlight the issue further, the top 20 local authorities which also include Bristol, Cardiff and Newcastle upon Tyne, account for almost 60% of all equity transactions since 2011. Birmingham is England’s second biggest city but is languishing in joint 20th position alongside Leeds.
The geographic patterns in UK small business finance unearthed by the report are alarming but not totally unexpected. There has always been a perception of a north/south divide, depending on where you live. And there will always be the London centric argument. Similar patterns emerge on a local level. The investments are taking place in the big towns and cities and not in the smaller towns and rural outskirts. The main issue here is why aren’t there enough investors based in these regions and how can the balance be redressed?
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