Paul Mason, head of corporate finance at Chiene + Tait, talks us through what he says is a resurgent investment climate for SMEs

The Scottish investment scene is going through a renaissance period with some very positive signs of growth on the capital raising landscape. Earlier stage investment across the SME community is one area where Scotland has consistently punched well above its weight.

Much of this investment success has been led by Scotland’s business angel community. The latest data from LINC Scotland, the business angel association, show over £50m in 2017 was invested through its members and the additional public sector funding this leveraged.

Angel investment is more common in early-stage investment, whereas the area in which Scotland’s businesses have traditionally struggled has been in securing later stage funding for more established businesses. In the final quarter of last year only £57m of the £2bn venture capital investments across the UK were in Scottish-based companies and that amount included over £13m which was a crowdfunding deal for Brewdog, leaving a disproportionately low level of investment across other Scottish businesses.

However, there are more positive signs elsewhere. The floatation of Quiz Clothing, Springfield Properties and Beeks Financial Cloud in the second half of 2017 all signalled an increasing interest from Europe and the rest of the UK towards Scottish-headquartered companies considering a flotation.

In 2018, we are also now seeing a significant increase in institutional investment - often funds managed by private equity firms – which are typically investing between £2m and £20m-plus into Scottish companies with strong growth potential and frequently at higher valuations. This is further supported by last year’s launch of the £200m Scottish-European Growth Co-investment Programme which is aimed at providing further growth capital into businesses across Scotland. The Scottish Investment Bank has been instrumental in developing and promoting this initiative, working alongside advisers like us as well as private sector fund managers who are participating in the programme.

These on-going developments are welcome because much of this capital is from outside Scotland, making it a form of inward investment into local businesses. It is being put behind solid, established companies that are ripe for further growth. This is a fundamentally different proposition from investing in higher risk enterprises which may become the next unicorn, but are statistically more prone to failure. Later stage investment further benefits businesses – and our economy – by enabling them to attract high-quality talent which is essential to driving their growth.

Within our own Corporate Finance team at Chiene + Tait, we have completed some exciting equity deals in the past few months. These include a multi-million pound institutional investment into an established Scottish SME, using a combination of bank debt and equity to fund the company’s acquisition of a larger competitor in England – a real success story for Scottish growth. We also advised on the £2.1m investment by London-headquartered Foresight Williams into Edinburgh-based Codeplay Software Ltd. This investment will allow the business to further expand into the thriving artificial intelligence market where it will develop solutions in the automotive sector, including advanced driver assisted systems and autonomous vehicles.

More recently we advised on the £2.25m investment secured by Hutchinson Networks from YFM Private Equity. This financing, which also attracted highly competitive bids from other institutional funders, will allow the continued international growth of the firm including its plans to extend staff numbers to well over 100.

Encouragingly for the wider Scottish economy we are continuing to see a flood of high quality companies seeking further equity investment – our near-term pipeline includes three Scottish companies aiming to secure between £4m and £15m.

The increase in equity funder interest underlines the current health of many Scottish SMEs: there are a lot of businesses with the right model, an excellent management team and a strong desire to achieve higher levels of growth, having proven the viability of their business model. While trade exits are always a potential option for such companies, it’s positive to see many opting to maintain independent ownership, increase their valuation and pursue equity funding to grow their business with a view to selling at a later date and securing a significantly higher return for all.

Judging from the traction we are seeing within the market, I don’t see a slowing down of this trend in Scotland. For those businesses which are ambitious to attract growth finance, it’s vital they consider the right investor. This decision needs to be about more than money and also consider the fit of the personalities involved and what else an investor can bring to their company including their sector experience, network and, potentially, future acquisition opportunities.

The rise of institutional investment into Scotland’s SME community is a great news story and is hugely significant for our economy. Equity investors from around the UK and beyond are increasingly recognising Scotland as a great place to do business and secure a compelling financial return. We must ensure this renaissance continues well into the future.