The received wisdom on the UK’s exit from the European Union is that it will result in a sharp downturn in investment, but there is, perhaps, a glimmer of light for entrepreneurs.
The latest Lloyds Bank Investor Sentiment Report suggests that between June and July investor sentiment dipped sharply. This was most pronounced in the property market, which registered a decline of 35.6%, with sentiment in relation to UK shares and government bonds falling 21.75% and 15.58% respectively.
On the face of it, this isn’t good for anyone or any business trying to raise capital? But according to research published today (July 28) by London-based private equity house IW Capital, SMEs may – perhaps counter intuitively – be Brexit beneficiaries.
Strong Support
In a poll of 1,000 investors IW capital found that 52% intended to support SMEs in the wake of the leave vote. Confidence in entrepreneurs was most pronounced among younger investors. In the under 34 age group, 72% said they were even more likely to support SMEs.
Unsurprisingly, given the concentration of investors in the capital, support for SMEs across all age groups was strongest in London where 68% of respondents declared themselves supportive.
Commenting on the findings, IW Capital CEO Luke Davis acknowledged the turmoil in the investment market but welcomed the apparently robust sentiment as regards the SME community.“What we can take from this research is that there is a silver lining from a business perspective as our nation’s investors are willing to support SMEs in the wake of Brexit -something that cannot be said for other investment classes,” he said.
A Safe Haven?
The question is – why does support for entrepreneurs remains relatively strong at a time when confidence in other asset classes is plummeting? In common with the Lloyds Bank report, IW Capital’s research highlights the negative impact of Brexit on overall investment confidence. More than half (55%) of respondents said they were not confident in the direction of the FTSE index of leading shares and there was also gloom over the prospects for property. So what makes SMEs different?
Perhaps one answer is that continued volatility in the share,currency and property markets has left investors casting around for save havens. For instance, the Lloyds Bank snapshot of sentiment showed a renewed interest in gold and commodities.
Small entrepreneurial companies are notoriously risky but that risk is at least a known quantity – and one that is understood by those who invest. Compare and contrast with the uncertain outlook elsewhere. In addition, investment in UK SMEs has been to some extent de-risked through tax incentives available under the Enterprise Investment Scheme (EIS).
And as Luke Davis sees it, underlying strength of the UK economy is is underpinning confidence in small and medium sized businesses.
“The UK is in a stable position to cope with market uncertainty because of the fact that it has a varied private sector, which is built on a range of industry sectors,” he says. Furthermore, the UK’s collection of more than 5.4 million SMEs – accounting for 99.9% of the private sector – means that small businesses can help drive economic growth so we do not need to rely on a select group of multinationals.
Meanwhile, in addition to angel investors and VCs, investment in early stage companies has been opened up to a bigger group of people by the success of equity crowdfunding platforms and other forms of alternative finance.
“The alternative finance industry supporting these businesses has also expanded rapidly – growing by 84% last year – which has created a strong support system for SMEs,” says Luke Davis.
So it may be that among a growing investment community, SMEs are still seen as a viable option.
But does all this amount to a silver lining? The jury must still be out on that one. Many small businesses aren’t exposed to Europe, but they are certainly vulnerable to any downturn in the economy as a whole. Meanwhile, in the tech sector, there was certainly widespread concern ahead of the EU vote over the prospect of any reduction in the ability of businesses to recruit talent from across Europe and the possible exclusion from the coming European Single Market in Digital Services. On the plus side, the weakness of the pound, particularly against the dollar, is making exports more competitive.
In the short term, IW Capital’s research suggests that Brexit will not necessarily damage investment prospects and may in fact have triggered a small bounce in sentiment.
SOURCE: Forbes – Trevor Clawson
