Growth Capital Update: Q3 2024
Investors take the summer off
257
deals completed
-22%
number of deals
£1.112 billion
growth capital raised
Our view of the market
Last quarter, we reported an upsurge in activity in the UK’s growth capital market. However, that did not continue into the summer months, with the volume of transactions declining noticeably in Q3. It appears that investors have enjoyed a protracted summer holiday this year.
This is in stark contrast to the M&A markets that we cover, where deal volumes were up in Q3. This suggests certain factors affect the UK’s growth capital market and private equity houses more than other types of transaction. We suspect that interest rate reductions not coming through as quickly as hoped and nervousness about new Labour government’s Budget at the end of October, particularly regarding CGT and the taxation of private equity carried interest, could be to blame.
According to our latest research into UK private companies raising between £1 million and £20 million of growth equity capital each, 237 UK businesses raised a total of £1.112 billion in the third quarter of 2024. The average deal size was £4.69 million.
Our Q3 figures reveal a 22% decline in the number of deals completing and in the overall amount of growth capital being raised compared with Q2’s 305 deals raising £1.433 billion. At the moment, 2024 is looking almost like a carbon copy of 2023 in terms of the fluctuating deal volumes. It remains to be seen whether Q4 2024 can buck that trend.
Later-stage VC deals were the most common type of transaction in Q3, accounting for 38% of all deals completed and 44% of total funds invested. Seed rounds also put in a strong performance, continuing the trend highlighted in Q1 and Q2. While later-stage bigger transactions continue to prove most popular, earlier-stage deals are also very much sought after by investors.
“Markets like certainty so it is not surprising that deal activity has slowed while we wait to see what the Chancellor has to say at the end of October. Nevertheless, the UK has a well-developed investment ecosystem motivated to fund exciting growth opportunities, and that is not likely to change any time soon. We expect to see the growth capital market start to pick up again in the final months of 2024 and into 2025.”
John Cowie, Head of Growth Capital
Technology sector
In Q3, the technology sector held its position as investors’ top choice, representing 44% of all transactions by volume and 43% by value. According to Tech Nation’s recently published 2024 report, the UK tech sector boasts 171 unicorns and a market valuation of $1.1 trillion, establishing it as the leading tech ecosystem in Europe. Last year, UK tech start-ups raised $21.3 billion, with most investments concentrated in Greater London, followed by the East of England and the South-East.
Notable UK tech sector deals
11x.ai, a start-up that builds AI bots for process automation, automating end-to-end workflows, raised $24 million in a Series A funding round led by Benchmark in September. The Series A round came a year after 11x.ai raised $2 million seed capital in a round led by Project A Ventures. Founded in London in 2022, the company calls its AI ‘agents’ automated digital workers, and says that its software can handle repetitive tasks, allowing human employees to focus on more strategic work.
In September, Ferovinum, a funding and supply chain platform for wine and spirits businesses, announced it had completed a £17.5 million Series A funding round led by Notion Capital. Ferovinum has created an end-to-end digital platform that helps businesses fund, produce, procure and sell to global wine and spirits markets. To date, Ferovinum’s platform has deployed over £114 million of funding in support of UK wine and spirits producers.
Trending: Materials and resources
We saw more than twice as many materials and resources deals completing in Q3 as we did in Q2. In Q3, this sector raised nearly nine times the amount of funds that we recorded in Q2. The average deal size in the materials and resources space in Q3 was £8.58 million – outstripping the average deal size across the whole market of £4.69 million. Materials and resources has proved popular as an asset class, especially with the drive towards resource conservation and economy greening.
Notable material and resources deals
In September, UK-based Notpla, an innovator in sustainable packaging and winner of The Earthshot Prize, announced it had raised £20 million to drive US expansion and innovation in sustainable seaweed-based packaging, replacing single-use plastics. The investment round was led by United Bankers’ UB Forest Industry Green Growth Fund.
UB FIGG’s Senior Partner, David Walker, said: “This investment aligns perfectly with our mission to drive green growth and promote sustainable practices across industries.”
In September, Edinburgh-based student start-up MiAlgae secured £14 million in funding to accelerate its operations and scale production. By repurposing nutrient-rich by-products from the whisky industry, the company grows microalgae, providing an ecofriendly source of omega-3 for fish feed. This allows MiAlgae to protect marine ecosystems by offering an alternative to the unsustainable omega-3 product derived from wild-caught fish. New investors SWEN Blue Ocean, Clay Capital and Rabo Ventures joined existing backers including Ascension Ventures and Scottish Enterprise in the oversubscribed round.
Active investors
Our most active investor in Q2, BGF, tied in Q3 for second place with two other investment firms (Scottish Enterprise and Innovate UK), both of which completed eight deals in the quarter. However, top spot in Q3 goes to Mercia Asset Management, which completed no fewer than 14 deals in Q3. Mercia’s investments in Q3 included:
- co-leading with Aramco an £8 million financing round into Nottingham-based Promethean Particles, a chemical manufacturing company specialising in metal-organic frameworks;
- co-leading with Smedvig an £8 million Series A round into Manchester-based human risk management platform CultureAI;
- participating in a £7.9 million investment round undertaken by Leap Automation, an Aberdeen-based company specialising in low-cost industrial AI robotics;
- investing in a £5 million round into CorrosionRADAR, a Cambridge-based business providing smart corrosion-monitoring solutions;
- leading a £5 million funding round into Alesi Surgical, a Cardiff-based company with technology to manage smoke created by surgical tools in operating theatres.
Outlook
The summer months often lead to Q3 being slightly quieter than Q1 and Q2, but this year the difference in activity is marked. It seems that investors are cautiously waiting to see what the rest of the year brings in terms of interest rates and possible changes to the UK’s tax regime for equity investments. Despite these temporary local difficulties, the longer-term outlook for the UK’s growth capital market remains positive. Investors may be keeping their powder dry for the time being but they will be keen to deploy their funds once market uncertainties are resolved.
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Methodology
Moore Kingston Smith has analysed transactions by UK-based companies that involve the issue of less than 50% of equity share capital to third parties and funds raised of between £1 million and £20 million. Accordingly, these numbers do not include senior debt and mezzanine debt fund raisings and smaller fund raisings by companies and start-up funding unless more than £1 million is raised. Start-up funding is generally significantly less than this amount.
The research aims to capture all transactions by UK companies that fall within the criteria. Inevitably there will be transactions that have taken place but have not been captured. The research is based on data extracted from Pitchbook.
