Big lenders signal new funding environment for Scotland plc, by Jeremy Grant

Last week’s revelation by the UK government that company insolvencies hit their highest level since 2009 made for dispiriting reading.

It’s clear that the hangover is finally kicking in from a cocktail made up of the end of pandemic-era government support, accumulation of debt, and the impact of higher interest rates. Scotland was not spared: 296 companies went out of business in the third quarter, a figure seven percent higher than in the same quarter of 2022. 

Yet behind the grim statistical headlines there is a more uplifting structural story to be told about the funding environment for Scottish business — one that may signal a new foundation for how the economy can be grown.

Last week the British Business Bank (BBB), a UK government-owned lender set up in 2014, started a series of roadshows to explain the nuts and bolts of a new £150 million “Investment Fund for Scotland”.

It’s part of a package of UK-wide funding for small- and medium-sized businesses (SMEs) designed to increase the supply and diversity of early-stage finance to regions where high street bank funding may be harder to access.

In a windowless room at the EICC conference venue in Edinburgh, I listened to pitches to about 40 small business owners by three fund managers appointed to manage tranches of the fund: DSL Business Finance, which will provide loans of £25,000-£100,000; The FSE Group, which will handle loans of £100,00 to £2million; and Maven Capital Partners, which will offer equity investments of up to £5m for a business.   

Last month, Edinburgh-based private equity firm Par Equity announced a £100m venture fund aimed at promising scale-up companies in health, climate and industrial technologies in Scotland, Northern Ireland and the north of England. Scottish National Investment Bank (SNIB), the Scottish government-owned development bank, British Business Investments (part of BBB) and Strathclyde University’s pension fund are co-investors.

Finally, SNIB since its inception in 2020 has invested £221m in 27 businesses in Scotland, ranging from Verlume, an Aberdeen company that develops subsea batteries for the offshore wind industry, to Forrit, an Edinburgh cloud technology scale-up.

Taken together, this trifecta of financing flows amounts to the emergence of a new funding environment that simply didn’t exist until fairly recently (at least, not on this scale).

It also points to the establishment of significant “patient capital” — debt or equity funding that prioritises sustainable growth as well as returns — that could help fire up new drivers for the Scottish economy, including the technologies needed for net zero. It’s no coincidence that the companies Par Equity fund has in its sights are in robotics, photonics, advanced materials and artificial intelligence. 

Jason Higgs, Deals partner at PwC Scotland, says it’s “encouraging to see this increase in funds available through new avenues to supplement the existing funding ecosystem”.

Two other things stand out. One is the fact that lenders in this trifecta appear to have more appetite for “projection-based lending”, which focuses on assessing an SME’s future prospects, rather than relying for lending decisions on a backward-looking analysis of financial performance.

The other is the geographical reach of the BBB’s fund managers, who have relationships with “business gateways” across Scotland. This will doubtless help in the bank’s mission — as chief executive Louis Taylor told me — “to make sure this money really gets to underserved parts of Scotland”.