Tech legend calls for interest rate cut to unlock investment
One of the most respected names in the UK tech sector has called for a cut in interest rates to help unlock investment.
Hugh Campbell is the managing partner of technology advisory and investment firm GP Bullhound and said another interest rate cut by the Bank of England would give the tech sector more confidence.
He told BusinessCloud: “I’m not an economist but there’s no doubt that as the government starts to get control of inflation they should find a way forward to reduce interest rates.
“That will reduce the cost of borrowing debt and it will reduce the pressure on households in the UK and that will flow through to investment.
“As businesses bounce back you’re going to see a much slower recovery for the investment cycle over the next 18 months. It will be a much more like a long U-shaped recovery rather than V-shape.”
GP Bullhound’s latest Titans of Tech report found the deal count had dropped 68 per cent over the last two years but Campbell said things were improving.
“It’s been a very volatile and tumultuous period,” he said. “We’ve seen the degree to which the valuations of technology stocks, both public and private, are so highly correlated with interest rates.
“Perhaps that’s no great surprise because the lower the interest rates are the more risk people are willing to take with their capital but the sell-off of technology stocks has been extreme.
“That’s caused a huge lack of funding for many technology startups across the UK, particularly those going after a Series B fundraising round.
“What we’ve tended to see with the availability of capital is it’s either gone much later stage towards profitable businesses or it’s gone much earlier stage towards seed or Series A.
“That leaves a whole bunch of businesses that were funded in the last five years seeking capital on their financial profile or commercial profile which is not now as acceptable as it was.”
Campbell said VCs had focused on profitability which had restricted investment levels.
“The VCs have made a huge case for driving towards profitability for many companies and that’s of course absolutely the right thing to do but that’s much easier said than done,” he said.
“It was only two years ago that those very same funds were pushing a ‘growth at all cost’ strategy.
“It’s always been, and always should be, difficult to raise capital. Clearly it was easier for a 24-month period of time after the pandemic with a glut of capital.”
Campbell compared the last two years as the ‘law of the hot potato’ for investors.
He explained: “If I’m investing at $100m the potato is getting hot and as long as I can throw it to someone else and it’s worth $200m and I’m out, then it’s all good.
“The longer you hold it then the more it’s going to burn your hands so if I can offload my hot potato to you then I’m going to be ok and you’re going to be holding it.
“Investors and acquirers of business want a stable economic environment in which to make these investment decisions.
“As interest rates crept up and up and up it was very difficult for them to price transactions because the cost of debt was uncertain.
“As long as interest rates are stable or are coming down it creates a much more positive environment for investment committees at funds or board of public tech companies to make acquisitions and investments.”
GP Bullhound recently acted as the exclusive advisor to Flo Health and its shareholders on a $200+ million Series C investment from General Atlantic, making the FemTech a unicorn.
Campbell said: “The market has improved significantly from the beginning of this year to such a degree we’re now seeing across our 50 or so M&A mandates that there is a significant amount of interest in acquiring these businesses.
“The deal cycle remains extended or longer than normal, probably by 60 days, but transactions are getting closed. Just look at the deal we did with LDC and Uinsure as well as the recently announced deal with Flo Health. These are really good examples of transactions that probably wouldn’t have got closed 12 months ago.”
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