Entrepreneurs cashing in with record levels of M&A activity

The number of mergers and acquisitions (M&A) of young enterprises is at a record high, according to the ninth edition of the Barclays Entrepreneurs Index, which has been tracking the UK entrepreneurial lifecycle since 2011. The number of M&A deals where businesses less than five years old were the target has jumped 28% from 395 in last year’s report to 505 deals this year. This is also 50% higher than the first report in 2011, when just 335 M&A deals were completed.

Wealth creation

The Barclays Entrepreneurs Index shows that indicators of entrepreneurial activity*, from starting, growing and exiting a business, are at their strongest levels since 2011. Yet while the record level of M&A activity is good news for entrepreneurs, who are experiencing the wealth creation that comes from exiting a business, the research shows opportunities to scale-up businesses are not being taken. The trend to sell-up rather than scale-up may be the result of an uncertain political and economic environment in 2016, which made it difficult for businesses to plan ahead and grow. Under these conditions it is perhaps more appealing for entrepreneurs to take an early exit from their business.

Venture capital investment decreases

Despite a surge in exits and wealth creation, the research also suggests that the number of UK high-growth companies is at its lowest level since the Barclays Entrepreneurs Index began tracking it in 2011, and is also 33% lower than its peak in 2013. High-growth companies are defined as those with revenues between £2.5m-£100m that have increased turnover by at least 33% over the preceding three years, and produced at least 10% year-on-year growth for a minimum of two years. . This may in part be a result of business owners seeking early exits, but another explanation for the decline in high-growth companies could be decreasing levels of venture capital (VC) investment. The number of companies that have received seed, start up or early stage venture capital is the lowest it’s been since 2011.

When it comes to investment at the growth stage, it’s interesting to note that the number of companies receiving expansion funding has also declined – but the overall value of this funding has increased by 70% year-on-year from £995m, to reach £1,690m in this year’s research. This may suggest that, although fewer companies are securing investment at the growth stage, those that do are each receiving a greater individual funding boost.

Entrepreneurial spirit

This mixed funding picture hasn’t dampened the UK’s entrepreneurial spirit, with the number of new businesses being incorporated at its highest level since 2011. There were 646,000 new businesses created in 2016, 8% higher than the previous year. Moreover, the ‘Total Early-stage Entrepreneurial Activity’ – the percentage of the working age population engaged in entrepreneurial activity – grew by 24% over the last 12 months.

Regional hotspots

While overall the picture for growth is not universally strong, there is cause for optimism regionally with hotspots of growth around the UK. This includes outside of the usual entrepreneurial hubs of London and the South East. The North West in particular is a hotbed of activity, with venture capital investment growing 9% over the last 12 months. Likewise, in Yorkshire and the Humber, venture capital investment is bucking the national trend with available VC funding increasing by 17% over the last 12 months.

Head of Barclays Wealth Management, Andy Houston, said: “It’s encouraging to see an increase in the number of new companies being created.  Furthermore, the strong uplift in the number of young companies being bought shows that UK start-ups are seen to have real value. However, while we are seeing moments of wealth creation through these M&A deals, it’s important that businesses are scaling up and not just selling up. At Barclays we are continuously looking at ways to help support the UK’s entrepreneurial community, from our Innovation Finance loans to our High Growth & Entrepreneurs Proposition. We want to ensure enterprises have the tools and resources they need to go on to expand and grow winning businesses that triumph in their industries.”