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Mixed Fortunes Continue In The Lending Sector

Insights by Wynn Thomas on 1st June 2023

At Rocking Horse, we continue to assist innovative companies access financing through our advance funding solution for both R&D tax refunds and Gov.UK grants, allowing SMEs to Innovate, Accelerate and Grow.

Contact us now and let us talk you through the process.

To say that companies have suffered exceptional uncertainty over the last few years would be a massive understatement. Sadly, this month sees no end to the unpredictability of the funding marketplace.

In this month’s funding roundup, we see unprecedented investment into the UK while noting Silicon Valley Bank’s collapse and the general contraction of the VC and PE markets for investment

Record Investment Into The UK From Japanese Companies

Hot off the press is UK PM Rishi Sunak’s announcement of record inward investment from Asia. Japanese businesses have made a substantial commitment to invest nearly £18 billion in various businesses and projects throughout the UK. This investment will drive growth in key sectors, create high-skilled job opportunities, and foster technological innovation.

Currently, Japan stands as the UK’s fifth-largest source of inward funds, with £92 billion already invested in the country. Additionally, the trade in goods and services between the two nations amounted to £27.7 billion last year, and this figure is expected to increase as the UK prepares to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The investments from Japanese companies will encompass various areas, including offshore wind, low-carbon hydrogen, and other clean energy projects. 

Marubeni Corporation, a prominent Japanese trading house, has announced its intention to sign a Memorandum of Understanding (MoU) with the UK government, outlining plans for approximately £10 billion in investment over the next decade. These investments will be directed towards offshore wind projects in Scotland and green hydrogen initiatives in Wales and Scotland. Through its subsidiary SmartestEnergy Limited, Marubeni already supports 500 jobs in the UK and will collaborate with the government to create a significant number of new green jobs.

Mitsubishi Estate and Mitsui Fudosan, two leading real estate companies in Japan, have confirmed plans to invest £3.5 billion in the UK. These investments will focus on constructing affordable housing, high-quality office spaces, and a life-science laboratory in London. This initiative is expected to support numerous job opportunities and contribute to the revitalisation of specific areas in the capital.

In addition to these commitments, Sumitomo Corporation aims to expand its UK offshore wind projects, resulting in a total investment of £4 billion in projects along the coasts of Suffolk and Norfolk, in collaboration with its partners. This significant investment solidifies the UK’s position as a pioneer in clean energy and aligns with the government’s target of installing 50GW of offshore wind capacity by 2030.

Sumitomo Electric Industries has announced its decision to establish a strategically important high-voltage cable manufacturing plant in the Scottish Highlands. This venture will bring over £200 million in investment and create 150 highly skilled green jobs. The investment will enhance the UK’s capacity to build resilient supply chains for critical infrastructure, particularly for offshore wind projects, and support the growth of UK developers, further contributing to overall UK growth.

This influx of Japanese investment will provide crucial support for growth in some of the UK’s most cutting-edge industries. For instance, Toshiba plans to expand operations at their Cambridge Laboratory, which specialises in designing and delivering advanced quantum-safe cryptographic communication solutions. This expansion will initially create more than 30 new jobs and involve an investment of over £20 million in new technology development.

The common factor among all of the projects announced is that they all feature high-tech, cutting-edge work, underlining the status of the UK as a focus of innovative thinking and development with cash going to companies as diverse as Cambridge Life Science & Tech, Bristol Aerospace and Leeds Digital Health

Octopus Looks East

Going the other way, Octopus Energy has announced its plan to invest £1.2 billion in the Asia-Pacific renewables sector by 2027. The company intends to allocate this capital to support solar and wind generation in the region, with a significant portion of the investment going towards Japanese renewables.

Octopus Energy initially entered the Japanese market through a partnership with Tokyo Gas in December 2020. This collaboration led to the launch of the Octopus Energy brand in Japan as a joint venture, with Tokyo Gas providing working capital and growth funding. 

The company’s expansion in Japan has been extremely successful, making it Octopus Energy’s second-largest market after the UK. The company has witnessed rapid growth, adding thousands of domestic customers each week, and aiming to reach millions of customers in the coming years.

UK VC Funding Tightening As Uncertainty Bites

Although the inward investment picture looks rosy, the Venture Capital sector in the UK is facing its own challenges and this is something that we have witnessed first-hand at Rocking Horse.

Whilst VCs don’t seem to be exiting the market, we are seeing a general tightening of lending criteria and VC partners looking for better terms and alternative co-investors to offset the increased risk in a changed monetary policy environment.

Naturally, this makes deals potentially less desirable for innovative companies and as always, it is worth thinking seriously about whether you are prepared to accept investment conditions before signing on the dotted line.

We have also seen instances of VC companies already being invested in businesses and being either unwilling or unable to make further advances.

This manifests itself primarily in an influx of inquiries from both VC backers and the companies themselves looking at ways to ease a short-term constriction of cash flow.

This type of situation is ideal for the Rocking Horse innovative R&D tax credit funding, where we are able to advance cash against the value of tax credit claims, allowing your development work to continue.

Goodbye SVB, Hello New Regulation?

Opened in 2012 to provide a range of banking and financial services to the UK technology, venture capital, private equity, and life science sectors, the Silicon Valley Bank collapse has been touted as the largest and quickest since Barings, back in 2008.

In many ways, the troubles could easily have been predicted with the bank specialising in lending to riskier high-growth startup tech companies that high street banks won’t touch. At the same time, the US arm bet heavily on long-term bonds expecting interest rates to stay low and when they didn’t, the inevitable happened.

Inquiries have begun in both the US and the UK, and it will be interesting to see the final reports into what actually went wrong.

Now sitting as a part of the HSBC stable, SVB’s collapse in the UK has raised two significant issues.

Firstly, it calls into question how the government will fund its new Science and Technology Framework, aimed at solidifying the UK’s position as a global science and technology leader by 2030. SVB’s focus on the “innovation economy” highlights the need for financing options to support UK tech firms. 

The collapse of SVB underscores the importance of leveraging the UK’s domestic financial services sector to support the growth of tech firms. However, it also highlights the significance of strong networks among bankers, venture capitalists, and tech entrepreneurs in developing a financial ecosystem tailored to specific sectors like technology.

The second issue raised by SVB’s collapse relates to the future of banking regulation in the UK. As part of the post-Brexit financial services ‘Edinburgh’ reforms, Chancellor Jeremy Hunt announced plans to review ring-fencing regulations for UK banks. 

One proposal is to raise the threshold for ring-fencing requirements from £25 billion to £35 billion, increasing the level of deposits needed. This raises important considerations for the future regulatory landscape and the measures required to ensure stability and resilience within the banking sector.

It will be interesting to see how the UK government squares the circle of its stated aim of reducing red tape and regulation whilst also ensuring that the UK banking sector is fit for purpose so watch this space.

R&D on the horizon?

If you are conducting innovative Research and Development work, then you could be entitled to claim R&D tax credits but the wait for a refund is tending to increase.

Why not leverage that value by using the Rocking Horse class-leading R&D tax credit funding solution? You can receive an immediate boost to your working capital rather than waiting months for HMRC to approve and finally pay your claim.

If you are working on R&D or you have some R&D projects in the pipeline, contact us now and we’ll explain how we can give you a working capital boost.