The saga of chip designer Arm’s move to New York has triggered much soul-searching about the future of London as a home for tech businesses, and its destiny as a capital market more generally.
Despite the lobbying efforts of politicians up to the Prime Minister himself to get them to stay and relist in London, the departure of a Cambridge-based UK champion has assumed totemic significance and caused much wailing and gnashing of teeth.
In my view, a sense of perspective is helpful here as Arm shares begin trading this week. Of course, tech owners want to chase the bigger valuations in the US, although the Arm experience dents that case slightly: the company is raising less money at a lower valuation.
The grass generally isn’t always greener across the Pond either, as research from Lazard found earlier this year: of 22 UK businesses that listed in the US in the past 10 years, only three are trading above the offer price, with average investor losses of almost 40%. Cyber security firm Darktrace, one of the bigger London tech floats of the last couple of years, is up more than 50%.
As for what Arm’s decision says about London, there are a few things we need to remember before we write ourselves off as a tech hub because the facts and figures tell a different story. Focus on the world of fintech, for example. The UK is home to 3000 fintech firms and the number is accelerating at 20% a year, according to Deloitte. We’ve produced some of the biggest players including Wise, Revolut and Worldpay.
The UK provided $11.1 billion in fintech financing in 2022, more than three times as much as France. And we’re second only to the US with £8.5 trillion in assets under management.
The trouble is too many of these firms don’t get the firepower from UK institutions to grow and become the next Google or Meta, because of market constraints and a lack of funding. According to Ron Kalifa’s 2021 review, more than half of fintech entrepreneurs saw themselves most likely selling up to a foreign buyer, compared with just one in six who expected to hang in there to build their business and take it to IPO stage.
The bulk of UK investments — 60% in fact — are aimed at seed funding and just 20% at follow-on funding. The figures show that we’re better at planting the seed than pouring on the fertilizer when the shoots are showing. Our firms are underserved by domestic capital and it is eye-opening that more than half of funding rounds over $100 million are funded by foreign investors, who seem more willing to take bigger bets.
The Kalifa Review identified a £2 billion gap in the market for growth capital and the creation last month of the new Fintech Growth Fund goes some way towards fulfilling that need.
The fund, on which Peel Hunt is acting as sole financial adviser, is led by some heavy hitters including former chancellor Lord Hammond. It also boasts an investment team which has done dozens of deals in the sector and should have up to £1 billion to deploy. Typically, the investment will be between £20 million and £40 million on average, with funding provided from Series B all the way up to pre-IPO rounds. The cash will be aimed at the businesses which have a proven model which just need the extra capital to grow, backing all British companies with minority stakes.
The fund will sit on the board and is intended to be a sound long-term partner as its lack of an existing portfolio means there isn’t an immediate pressure to exit. The pressure on tech valuations in the past 12 to 18 months also means it is a good time to step in with a new source of capital at an appealing entry point for investors.
In tandem with all the other City reforms unveiled this year, from simplifying listing rules, to revitalising research and cutting red-tape around capital-raising, the Fintech Growth Fund should form an important piece of the jigsaw to help revive the London market and make the most of our solid foundations in the sector. If we can plug this important gap in the market, in time London can make the most of its considerable strengths and ensure that high-profile departures like Arm’s are the exception rather than the rule.
Steven Fine is chief executive of investment bank Peel Hunt