Gerard Kelly: Working with our partners, we can build businesses

Together with our private-sector partners, we have co-invested more than 400 million of risk capital over the past seven years in an array of around 335 young innovative Scottish companies with exceptional growth potential and global ambition. Many of these are in sectors where Scotland has global potential and competitive advantage such as digital media, enabling technologies, life sciences and energy.

The co-investment model has proved to be a catalyst for an increase in the number of investors and the amount of risk capital available. This has come at a time when venture capital fundraising in the UK reached a ten-year low and Scotland was able to buck the trend with our investment funds helping to maintain investment activity and go some way in sustaining confidence in the investment community.

According to a recent Nesta research report on Venture Capital, public funds hardly featured in the dotcom era but now they participate in 40 per cent of all venture capital deals and 56 per cent of all early stage deals. 2009-10 once again demonstrated the crucial role the co-investment model plays in developing Scotland's early stage risk capital market to support high growth and technology based innovative firms.

Continuing economic instability has contributed to strong demand for our investment funds and as a result we were able to increase our level of activity for the fifth year in a row, investing 32m in 115 deals which helped leverage a further 68m of private-sector capital.

Prevailing market conditions have also had an influence on the pattern of investments with a slight drop from the previous year in the overall number of deals from 130 to 115 and with the average deal size increasing from 200,000 to 224k.

This wasn't entirely unexpected with many of our established private-sector investment partners concentrating resources on sustaining their existing portfolios rather than taking on new investments. That said, during the year, the percentage of investments new to SE's funds remained high at 32 per cent, similar to 2008-9. These new deals were largely brought to us by recently recruited partners, showing the value of continuing to sign up new, high-quality private-sector investors to our funds.

Unfavourable economic conditions have had an impact. However, in recent weeks, we have seen evidence of SE's investment portfolio maturing with two exits from investments, including one from mobile ticketing company, Mobiqa and one from Mpathy Medical Devices, in conjunction with one of our longest-standing co-investment partners, Archangel Informal Investments.

In the past year, we have also managed to generate 3.5m of income from our portfolio, a 75 per cent increase on 2008-9.This income growth in part resulted from a decision to dedicate more time and account management resources in those companies which offer the greatest levels of economic and commercial return via a team of professional investment managers who were able to access the network of wider support from the commercial, industry and account teams within SE.

Maximising returns from investments presents future opportunities to deploy recycled funds to address any continuing gaps in the market. The challenges that lie ahead for Scotland's early-stage risk capital market are numerous and complex. It is critical that we work with ambitious Scottish companies and our private-sector partners to develop innovative investment solutions that can make the best use of available resources and maximise the contribution to Scotland's economic growth.

I am confident that with the continuing support of our private-sector investment partners, the SE board and the Scottish Government, allied to the professionalism and commitment of SE's investment team, we will continue to build on the excellent progress made to date.

• Gerard Kelly is investment director at Scottish Enterprise.