Between the lines: Welcome news on risk capital

THE latest data ­suggests that Scotland's economy is tending to under-perform the UK as a whole, possibly related, at least in part, to the impact of a ­sustained fall in oil prices.

Jeremy Peat says Scotland's risk capital market is steadily improving. Picture: Sandy Young
Jeremy Peat says Scotland's risk capital market is steadily improving. Picture: Sandy Young

It is therefore a particular delight to be able to report some good economic news.

The report on risk capital provision in Scotland in 2014, recently published by Scottish Enterprise, paints a very positive picture – in some ways the most favourable since before the great recession. Of course, not everything in Scotland’s risk capital market is rosy. There are still major challenges to face.

The study was undertaken for Scottish Enterprise by Jonathan Harris of Young Company Finance.

Total investment increased to £244 million, up 20 per cent on 2013 and close to the 2001 record high of £250m. Increased investment from Scottish Enterprise, primarily via the Scottish Investment Bank, needs to be set alongside these figures. Remarkably, less than one per cent of SMEs secure equity finance in any one year. But this small group of firms makes a disproportionately positive impact on the growth of our economy.

They tend to be more innovative, faster growing, ambitiously managed and with expectations of international success. To encourage faster growth Scotland needs more such companies, receiving ­initial funding from supportive sources and then having access to critical further funds as their development accelerates. The test for our risk capital market is whether it can fulfil these needs.

The bulk of the £244m invested was for follow on activity. That accounted for £205.5m as compared to £38.6m in first-time investments. Nevertheless the number of firms receiving first time funding, at 52, was well up on previous years. Much of the ­initial funding comes from business angels. Scotland has an increasingly effective business angel ­sector, which was particularly active, investing £26m, nearly double the norm in previous years.

It is at the level beyond the angel that Scottish companies have often faced problems. Venture capitalists are seeking to invest in lower risk and more established businesses. They are now participating in more investment deals in Scotland – the case in both 2013 and 2014.

Scotland’s risk capital market is steadily improving. Looking forward, we will rely upon the angels ­continuing to play their key role, with more and more focus on VCs and institutional investors.

I regularly bang on about the need for innovation, enhanced productivity, more global ambition and the like. Companies dependent upon risk capital can help in a major way. If they merit funding then this should be available in the best possible form.

• Jeremy Peat is chairman of the Scottish Enterprise Economic Policy Committee