AXIAL CAPITAL

Just into the second quarter of the year and 2022 is already shaping up to be broadly a high performing year in terms of investment into growth companies. To put a spotlight on this article, it’s the emergence of the European scale-up ecosystem that has caught our attention.

Prior to 2021, a smaller proportion of Europe’s venture investment went to late-stage growth rounds. In 2021 a shift began to take place, with more significant amounts allocated to late-stage funding. Funding for those companies came from equity-led investment firms in the private capital markets and from a number of small-cap public listings where those scaleups could get access to public markets liquidity.

Let’s look at the numbers. Quarterly funding in Europe in 2020 ranged between USD$10 billion and $13 billion in each quarter. This trended upward through 2021 when it totalled $24.6 billion in the first quarter alone. 2022 is set to dwarf those numbers with venture investment already up by 21% on an annualised basis. Through our client portfolio alone we have seen offers of co-investment into companies in the EV, battery-tech, medical, and SAAS sectors to give a combined post-money value of more than $300m in private and public capital markets.

The six countries that led in scaleup funding over last quarter are the UK at the forefront with France, Germany, the Netherlands, Switzerland and Spain also showcasing support for stellar growth companies.

At a global level capital flows into VC backed companies in fact fell in the first quarter, but in Europe the picture was quite different with scale-ups receiving more investment on both an annual and quarter-over-quarter basis.  Europe is a growing venture market with an increasing number of high-performing scaleup companies, and clearly those businesses that prove their revenue model and their market fit are attracting the bulk of funding in 2022. The message is clear, where there’s traction money will follow.

With both private equity and public capital markets continuing to give access to new capital this year, we are pleased to have been appointed to advise on a London battery-tech IPO, and concurrently concluded on financial commitments into UK real estate. Our domestic and cross-border investment focus for scaleups provides increased liquidity to founders and this Q1 update highlights how supportive the markets are across ever-broad sectors:

• Energy and Renewables continues to be a focus for our investor network, and this month we are into DD on a SAAS based energy management solution to reduce power consumption, and CO2 output accordingly – seeing great momentum in ethical investing. We expect to see a further allocation of capital into this sector through the year, with some great entrepreneurs presenting their technology to us.
  
• Battery technology of varying forms are high on the agenda for the foreseeable future, and as we progress the terms and pricing for a £100m IPO of our client in the commercial battery regeneration space the co-investment interest from both our UK and North American network is overwhelming. More headlines to follow in the months ahead.
  
• Many experienced property developers will cite the increasing costs of materials and reducing availability of skilled labour across the industry. And this continues to be the case on both counts. In spite of this the market remains buoyant and this month we concluded investment terms for a 14 dwelling development in Suffolk to be built and sold over the coming 18 months.

Axial Capital recently attended the London Small-Cap virtual conference looking at the benefits enjoyed by scaleups and VC-backed startups when accessing liquidity in the capital markets. With our investment model having a focus on companies in the £1m-10m space across the UK and EU, we were pleased to hear other conference participants across both private finance and equity capital markets tell us they see the same clear horizon for placing further liquidity into growth companies – both public and private.

Equally positive is the conversations we have had in recent weeks on UK/Italy investment in particular, for placing capital into Italian growth-companies, and capturing investment from that market at the same time. This also extends to the public markets, and as we continue to lead on the dual listing of a cross-border resources technology company with a US HQ, engagement with the London-Italy investment base has played a unique part in how we complete this round of financing.

This positive experience is in part due to the flow of impressive startups out of Italy, which we continue to engage with for investment and access to equity capital markets. From CyberSecurity to FoodTech the innovation and energy emanating from across the region is brilliant, with a number of these companies set to be rising stars of 2022.

Going public through a special purpose acquisition company is nothing new, but in the US it’s certainly made a big splash in the mainstream in the recent couple of years. And now it’s in vogue on this side of the pond, too.

Special purpose acquisition companies, still viewed as a less respectable way to go public by the more traditional banking society, have been forming and going public at an unprecedented pace this year. As of this month more than 270 SPACs hit the public markets since the beginning of the year, all of these in the US, and at least 20 of these have been used by VCs to channel growth companies such as SoFi and Payoneer onto the public markets.

Clearly, the companies going public are no longer the under-the-radar types. Well-capitalized companies with brand name recognition are among those to go public or to announce their intent to go public through a SPAC.

With SPACs forming and going public every day, we decided to keep track of the companies that had announced they’ll embark on their next funding round via a SPAC takeover, as it’s a valuable bellwether for UK entrepreneurs when looking toward future funding rounds. Traditionally, the pillars of VC investment involve driving rapid growth in a young company and achieving an exit at a many-times multiple of the initial investment. And the pillars of PE investment were to strip out costs of an established company to drive up bottom-line returns and to achieve the same exit – a many-times multiple of the original investment. The public markets offer an alternative.

Whilst an increasing number of scale-up companies are choosing to remain private for longer, by recycling cashflows and handling investment rounds through more private channels, a good number of high growth companies are enjoying the benefits of a public listing – and in the UK that’s increasingly going to include the power of SPACs.

When a scale-up company rolls into a publicly listed shell (the SPAC), there is often already a level of cash in that shell and a further funding round is brokered for the merger – effectively an IPO in a different guise. Whilst the company is expected to perform and to ultimately deliver dividends and incremental value in its share price (translating into an increased market capitalisation), the sometimes high-pressure existence of hitting a VCs exit horizon of 3-5 years doesn’t exist. Ideally the company will flourish and will remain trading publicly with strong growth and increasing market capitalisation, giving the founders flexibility in when and how they may want to realise their personal value in the company – and ultimately to exit at a time that suits them.

Axial Capital advises on small-cap public listings, typically up to £100m of value, and is actively considering investment for proven scale-up companies across a range of sectors. Contact us to discuss your objectives if a suitable funding round is planned for your company.