The word on the street

30/07/07

Welsh economy set for increased private equity investment

A winning combination of unprecedented quarter-on-quarter economic growth and extremely low levels of inflation has sparked renewed interest in the UK as an investment destination.

However, a number of economic and investment experts believe it is Wales’ connected financial and investment support framework that is rapidly turning the region into the UK destination of choice for private equity and business angel investors keen to capitalise on lucrative early stage deals.


Over the past financial year (2006-2007) the UK attracted a record 1,431 investment projects from overseas companies according to figures published recently by the Department of Trade and Industry’s UK Trade and Invest organisation. Of these, Wales secured 67 – an increase of more than 30 per cent over the previous year.

At the same time Wales outperformed a number of other key regions including the South West which attracted 57 projects and Northern Ireland with 31.

According to Steve Smith, Development Fund Director at Finance Wales plc these figures are a positive reflection on the wider economic stability and increased levels of attention Wales has been receiving from private equity investors and business angels across the UK.

Speaking at a conference organised in association with the British Business Angels Association in Cardiff, Wales recently, he said: “In 2006 business angel investment in Europe totalled an estimated £3bn-£4bn compared with £3.8bn invested by venture capitalists (VCs).

Much of this dampening of the VC investment appetite can be attributed to low returns on early stage VC funding in Europe, with many looking to invest in late stage deals which can deliver positive internal rates of return (IRRs) over a reasonably short period of time.

“The slowdown in VC funding has created a huge opportunity for European business angels to benefit from the emerging equity gap. And by providing both risk capital and mentoring support to Small - and Medium Enterprises (SMEs) there is potential for explosive growth on a global level.”

The favourable economic climate brought about by consistent economic growth and extremely low interest rate rates in the UK has also meant that many would-be investors traditionally looking for high growth in emerging markets such as India, China, Russia and Brazil are now hoping to spot opportunities on their own doorstep.

Added Mr Smith: “The 30 per cent increase in inward investment into Wales demonstrates that the region - with its connected financial and investment support framework, political and economic stability, world-class creative talent, and strong research and development base – will continue to attract private equity investment on a global level.”

One such investor is Geoff Andrews, ex-Pinacl Communications Systems Ltd Executive Director, who acquired a stake in highly successful early stage business Trace Technologies a year ago.

A business angel with xénos, the Wales Business Angel Network, a subsidiary of Finance Wales plc, Mr Andrews played a key role in the syndicated investment of the St Asaph-based opto-electronics company after its founders acquired the intellectual property rights to a software programme previously developed by a BAe Systems-led consortium.

The software known as Photonic Interconnect System Designer (PISD) is an engineering tool which greatly reduces the time and costs involved in the design and testing of fibre optic wire harnesses used in aircraft, ships, cars and other defence vehicles.

Commenting on his investment, Mr Andrews said it was the knowledge that the company had already acquired the intellectual property (IP) rights to PISD that first attracted him to the venture.

“Before investing in a company, you need to understand the opportunity and in this case how the technology would work in the market. You also need to know that the people within the business can deliver and that the investor can add value and enable the business to succeed.

“Trace Technologies very cleverly negotiated an exclusive licence to turn the consortium-led research and development and IP into an engineering tool and furthermore managed to negotiate a complete purchase of the software.

However, Mr Andrews said he was also able to benefit from Wales’ highly connected early stage business support network.

He added: “Investments of this nature can often take a lot of time, but by tapping into Wales’ connected environment and the xénos network, we were able to obtain Regional Selective Assistance from the Welsh Assembly Government and further commercial funding via Finance Wales plc and HSBC bank.”

Confidence in this winning investment formula is also shared by Shaun Oxenham, CEO of Enfis plc which went from conception at Swansea University to Alternative Investment Market (AIM) flotation within five years.
Enfis plc develops semiconductor-based light source modules and systems using the latest advances in semiconductor opto-electronics device fabrication, thermal management and optical design technologies.

The company was initially funded by Finance Wales plc and the venture capital company, Wesley Clover Corporation, chaired by Sir Terry Matthews and achieved flotation in March this year after successfully placing £4.5m in shares with City institutions.

Said Mr Oxenham: “To get into the US$22bn lighting market, you need more than just a bright idea. As a spinout from Swansea University we were required to show that our product had market credibility and that potential investors were not just putting money into an incubator-type environment.”

After obtaining first round funding from Finance Wales plc, Enfis was able to get a deep domain understanding of how its technology would function within the marketplace.

“The funding allowed us to invest enough resources into the development of our IP portfolio both in Europe and North America. We were also able to bring on board key staff and attract further angel investment and VC.

“As a result we are now able to compete toe-to-toe with our key competitors in New Jersey, California and Taiwan and realise our vision of becoming the dominant player in the next generation lighting space.”

The availability of flexible funding to take technology-driven companies with strong IP to the next level was also a determining factor for Stuart Gall, Commercial Director of Biofusion who recently acquired the rights to 100 per cent of the university owned research generated at Cardiff University.

Having previously acquired similar rights from the University of Sheffield for the development of medical life sciences, Mr Gall is very excited about the future for investment-led early stage businesses.

“Our exclusive partnerships with some of the top research universities in the UK – Cardiff and Sheffield universities - has enabled Biofusion to invest in the of the world’s most advanced and exciting science, turning world-class research into sustainable businesses through the creation of a growing portfolio of companies in fields such as drug discovery, alternative energy and engineering.

“Cardiff University, for example, is ranked seventh in the universities ranking list for the quality of its departments which are likely to generate IP with commercial potential such as engineering, chemistry, bio-sciences and medicine. The University has also allocated around £1bn for research and development over the next ten years. What’s more, we are able to tap into the well-established and highly-connected tech-transfer team at Cardiff University.”

Using a simple model where the university does what it’s good at – creating and generating world-class IP; Biofusion then tasks the tech-transfer team to monitor the process and evaluate the commercial potential of the concept, obtain the necessary patents and licences and then steps in to commercialise it. This process includes business planning, market research and obtaining appropriate funding from start-up to exit as required.

The model is already proving successful and within months of signing the deal Biofusion has already identified three excellent opportunities which are now off to the starting blocks.

Mr Gall added: “There is a huge amount of investment and funding opportunities in Wales. The challenge is to remember to play to your strengths and then find the right funding and support partners to take you to the next level.”

Further information contact, M & M Communications on 079 5869 0659 or buzz@mandmcomms.com