Technology has been a lucrative space for private equity firms in recent years. A shift has occurred as firms move away from traditional business methods of buying underperforming companies and simply restructuring them for profit, towards looking at longer term investments in promising tech start-ups. In the US, five of the 10 largest buyout deals in 2015 were technology companies. Carlyle Group’s $6.6 billion deal for Symantec Corp.’s data-storage and recovery business was the largest buyout, followed by a $5.3 billion acquisition of data-software company, Informativa Corp. by Permira Advisers and Canada Pension Plan Investment. In the UK, there was a 124% growth rate in private equity investments into tech companies from 2014-15, where total deal value reached £865 million.
The growing importance of the technology sector has also meant policy makers have had to react, ensuring they quickly create the necessary infrastructure, regulation and business environment to attract investment. The tech sector is reported to be growing 32% faster than the rest of the UK economy, and is therefore a key industry that government wants to get right.
The 2015 Conservative manifesto set a target of making the UK “the best place in Europe to innovate, patent new ideas and set up and expand a business”. Following their election victory, George Osborne chose to ring-fence the UK’s £4.7 billion science budget in the 2015 Autumn Statement, despite rumours it was due to be cut, while Sajid Javid, then Business Secretary, announced plans to create a National Innovation Plan to help make Britain a “world leader” in disruptive and emerging technology.
Since Theresa May has entered Number 10, she has looked to build on such announcements, recognising the importance of technology in building up the UK’s economy post-Brexit. In her first annual CBI speech in November 2016, she announced an additional £2 billion of investment per year in nationwide R&D and a new Industrial Strategy Challenge Fund, designed to mirror the hugely successful Defense Advanced Research Projects Agency (otherwise known as Darpa) programme in the US, in hope of generating cutting-edge technology across the UK. She flatly put it, “we’re ambitious for Britain to become the global go-to place for scientists, innovators and tech investors”. Philip Hammond’s Autumn Statement also set aside over £1 billion to ensure businesses across the country have access to the “gold standard” of broadband, a prerequisite of sustainable growth. Industry experts have repeatedly criticised the UK’s internet infrastructure for falling behind economies such as Mexico, Turkey, and even Latvia. £400 million will be spent on a new ‘Digital Investment Fund’, while £740 million will be put towards trials on 5G internet across the country.
Despite this, the government’s strategy towards supporting tech firms was heavily criticised at the recent Consumer Electronics Show in Las Vegas, one of the largest such expos in the tech calendar. Gary Shapiro, the event’s organiser, described the UK’s lack of support for start-ups as a “source of embarrassment” and the country risked being eclipsed by countries such as France, the Netherlands, and Israel. Shapiro went on to state that UK ministers have a “short-sighted attitude” towards the benefits of investing in technology, citing the fact that Canada, France, China, Taiwan and South Korea are all ahead of the UK in terms on participation at this year’s event. Despite Shapiro’s comments being refuted by some as a PR stunt, they still warranted a response from government who emphasised the “targeted support” being provided to UK start-ups.
This news has also come amid some mixed responses from the UK tech industry over how Brexit might impact them. Before the referendum vote, it was difficult to find anyone in the industry who supported Brexit. This was signified in an open letter to the Financial Times signed by several household names in the UK tech scene in April 2016 that stated leaving the EU “will undoubtedly undermine the ability of Britain’s entrepreneurs to start-up, innovate, and grow”. Since then, a series of pieces in the UK press have been published, displaying optimism that the UK tech scene can survive outside the European Union. Taavet Hinrikus, the Estonian-born founder of London-based online currency exchange TransferWise, summed up his thoughts, “entrepreneurs are optimists by nature, so we’re hoping to make it work”. In July 2016, Tech City conducted a survey among 1,200 leading professionals in the industry, which showed only 22% expected to scale back their planned growth ambitions. However, the same report stated 51% of respondents thought it would now be more difficult to attract, and retain, the very best talent in the industry.
This creates an interesting environment for investors looking to back UK technology firms going into 2017. The government has shown clear indication it is committed to putting money behind technology and innovation projects, and that it wants investors to see the UK as a safe space to invest. However, as with many tech companies, only the most agile survive in an ever developing global business environment. Although the UK government appears to be doing some good right now, with London boasting the highest number of ‘unicorns’ out of any European capital, the latest criticism from Gary Shapiro and the uncertainty brought about by Brexit acts as a reminder that the government may need to review their plans to ensure tech firms, and their respective backers, still look to invest in the UK.