Large cities should underpin strategy to increase equity investment in UK business – Centre for Cities

• London-based businesses secure more than half of all UK equity finance deals
• Large cities like Manchester, Birmingham and Leeds need better conditions for business growth to compete with London
• Industrial Strategy should position large cities outside of London for a bigger role in attracting equity investment, Centre for Cities says

Large cities attract less equity investment into their businesses than London because they struggle to foster the right environment for growing and scaling firms, according to new analysis by Centre for Cities.

Its report, Angels' delights: Why cities matter for equity investment, sets out to explain the concentration of equity investment in London. Firms based in the capital secured an estimated 51 per cent of equity deals between 2020-24, compared to 12 per cent in the nine next largest cities combined – including Manchester and Birmingham – and six per cent in Oxford and Cambridge.

The concentration of equity finance is even greater when measured by value: London attracted 61 per cent of the value of equity deals, ten times more than the next nine largest cities (6 per cent). Oxford and Cambridge combined secured 7 per cent.

But Centre for Cities' analysis shows the “equity finance gap” shrinks after accounting for the number of highly innovative businesses that might benefit from equity investment. It found:

• Large cities have fewer investable firms than London: Innovative SMEs likely to seek equity investment make up an estimated 0.8 per cent of SMEs in London, compared to 0.4 on average across the nine next largest cities. Bristol performs best among these, at 0.6 per cent, followed by Leeds at 0.5 per cent; Manchester sits at 0.4 per cent, while Birmingham trails at 0.3 per cent.

• Equity-backed firms in London are better at scaling: Equity-backed firms in London have on average turnover of over £6.9 million a year, compared to £5.1 million on average in the nine next largest cities.

• As a result, London-based, equity-backed firms achieve bigger valuations: Median deal values grew 17 times from early-stage investment (£1.3 million) to late-stage and exit (£22.7 million) in the capital, compared to 11 times (from £0.9 million to £9 million) in other large cities.

• ‘Home bias' alone does not explain the large cities' equity gap: London investors play an important role in supporting investment all over the country. There is no evidence to suggest that external investors – particularly from London – would fail to invest in investable businesses based in the large cities.

The concentration and scale of equity-backed firms in London likely reflects the capital's large, specialised labour market, management expertise and professional networks. Large cities should aim to replicate those conditions to make more and larger equity deals.

Centre for Cities says that the Government's Industrial Strategy can fulfil its aim of increasing equity investment by strengthening the business environment in large cities, for example through:

• Providing equity-readiness business support for firms;
• Increasing the supply of workspace and incubation space;
• Improving public transport connectivity in and out of city centres.

Andrew Carter, Chief Executive of Centre for Cities, said:

“We have a big market for investment in the UK, but in recent years it's been declining. Getting more investment in our large cities is a way to tackle that decline in investment.

“The large cities currently play a crucial national role in supporting equity investment alongside the ‘Golden triangle' of London, Oxford and Cambridge.

“For the Government to fulfil its ambitions of securing more investment for homegrown firms and making the UK the best place in the world to start and grow a business, it needs a strategy to help the large cities to fulfil their potential.”

ENDS

Notes

1. Centre for Cities is the leading independent think tank dedicated to improving the economies of the UK's largest cities and towns. It is a charity that works with local authorities, business and Whitehall to develop and implement policy that supports the performance of urban economies. It does this through impartial research and knowledge exchange. For more information, visit https://www.centreforcities.org/about/
2. ‘Angels delights: Why cities matter for equity investment' is available to read and download at the following URL:
   https://www.centreforcities.org/publication/angels-delights-why-cities-matter-for-equity-investment/
3. Launch briefing: Centre for Cities will host an online launch briefing on the event from 13.00-14.00 today. Register online:

https://www.centreforcities.org/event/sme-finance-the-geographic-gap-in-equity-financing/

4. Data sources: Individual company-level data on equity investment deals and volumes is from Dealroom, via The Data City.
5. Methodology: Centre for Cities estimates the size of the base of growing, innovative, equity finance-seeking businesses in each city by identifying small- to medium-size enterprises classed as ‘innovative' by The Data City.
6. The next nine largest cities after London are, in order of size: Manchester, Birmingham, Glasgow, Newcastle, Bristol, Sheffield, Leeds, Liverpool and Nottingham. Centre for Cities uses its ‘Primary Urban Area' definition to determine the boundaries of each city.