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UK tech – Record breaking levels of foreign investment in start-ups

  • UK tech sector is the largest in Europe
  • Foreign investment in months to end of July 2019 already exceeds the total figure for 2018
  • Currency moves are making the UK more attractive to investors
  • Matched by strong fundamental advantages of the UK tech sector

UK Prime Minister Boris Johnson will be meeting various EU leaders this week in an effort to resolve issues relating to the Brexit process. The ever-extending Brexit timetable has created additional uncertainty for businesses, with many putting plans on hold. However, the all-important UK tech sector is thriving and is actually experiencing record levels of foreign investment.

Source: Checkout

Recent figures show that £5.5bn of foreign investment was pumped into UK tech companies in the period form January to July 2019. It’s a big number in its own right, which stands out even further when put in comparative terms. The foreign investment into the UK during that period was in excess of that invested per capita in the US tech sector. Nicky Morgan, secretary of state for digital, culture, media and sport said;

These fantastic figures show the confidence overseas investors have in UK tech with investment flows from the US and Asia at an all time high… We have a longstanding reputation for innovation and the statistics endorse our reputation as one of the best places in the world to start and grow a digital business.

Source: Business Leader

 

Currency led

Currency moves are part of the reason foreign investors are being drawn to UK tech stocks. The GBPUSD price chart below shows how UK investments made now would, in US dollars, be up to 15% ‘cheaper’ than they were in April 2018. US and Asian firms invested the most in the seven months to July – a total of £3.02bn. If the price chart below is marking a ‘double bottom’ and sterling is to rebound to some extent, then USD-denominated investors who have not hedged their outlay would benefit from that move as well.

GBPUSD – Price chart – Five years:

Source: TradingView

 

Fundamentals

The total of Asian and US investment in the UK Tech sector, since 2013, now stands at $14.6bn. The comparable numbers for Germany and France are $6.5bn and $2.5bn respectively. The relative strength of the UK over a six-year period highlights that whilst the recent currency supports the case for foreign investment, the direction of travel is underpinned by strong fundamentals.

Source: Techworld (© YouTube/Eileen Burbidge)

Eileen Burbidge, chair of Tech Nation said:

The fact that this is growing is a testament to the strength and depth or our entrepreneurial talent, coupled with the dynamic and deeply engaged ecosystem that has been established here in the UK.

Source: IT Pro

The competitive advantage of UK-based tech firms is expressed in the below schematic provided by Consultancy.uk. The one area where the UK could make progress is in the skill set of its workforce. The immediate concern is the security of positions held by EU nationals who may be unsettled by the 31st October Brexit deadline. Longer-term investment in the domestic workforce is a priority but there is the possibility that more relaxed policies on immigration might permit hiring on a more global and less-EU-centric basis.

Source: Consultancy.uk

 

Follow the money

Understanding where this money ends up offers an insight into investment patterns. The recipients tend to be larger firms from the sector. This reflects that the work involved in carrying out due diligence makes the placement of larger sums more cost-effective. Checkout.com received £190m in Series A funding from New York-based Insight Partners, supply chain finance company Greensill received £660m from Japan’s Softbank and OVO Energy £180m from Tokyo’s Mitsubishi Corporation.

Deliveroo’s £475m Series G round led by Amazon and Fidelity takes the firm’s total funding to $1.53bn. Whist Deliveroo is still privately held, its direct competitor, Just Eat plc (LSE:JE) is listed. When news that prestigious investors such as Amazon were piling into Deliveroo, the share price of Just Eat fell 7%.

Just Eat – JE. – Share price YTD:

Source: TradingView

The Just Eat share price has rebounded off the news of a merger with Dutch rival Takeaway.com. Short interest in Just Eat currently runs at 3.1%. It peaked at over 7.5% on 4th June and the recovery in the share price after that date reflects the closing out of short positions / taking of profits.

Source: ShortTracker

The longer-term price chart will show a lot of investors who went long on Just Eat will be sitting on substantial returns. This is despite the management of the firm coming in for criticism. Analysts at Barclays said:

“Just Eat shareholders would be getting the best operator in the space to run the business – a notable shift from missed execution from management in the last few years.”

Source: The Guardian

With a track record of poor CEO selection, the firm was at one time described by a US hedge fund as:

“The worst-performing public equity in online food delivery globally.”

Source: This Is Money

Some of the appeal of UK tech companies might be explained by Just Eat, the poorly managed ‘dog’ of its sector seeing its share price rise from £2.50 in 2015 to £7.75 today.

Just Eat – JE. – Share price 2015-2019:

Source: TradingView

 

Unicorns

There are many investors from the UK and the rest of the world who are invested in UK tech firms that provide returns far greater than those made in Just Eat. Industry site ITPro estimates that the UK is creating one privately held tech firm with a valuation in excess of $1bn per month. On a city-by-city basis London, hosts 18 fintech ‘unicorns’ and trails only San Francisco in this sector. Away from the capital, Cambridge, Oxford, Bristol, Manchester and Leeds are all home to at least two unicorn companies. As well as fintech, the sectors these operate within include retail, deep tech or industrial and healthcare.

A tech boom is always welcomed but the timing of the recent surge by UK-based firms is particularly fortuitous for the Johnson-led government. The geographical spread across the UK will also be noted.