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UK venture capitalists build up 'dry powder' ahead of potential coronavirus disruption

"The full impact on equity fundraising is likely to be seen in the number of equity deals and investment in Q2 2020 onwards".

venture capital

Britain’s venture capitalists have reserves or 'dry powder' worth £9.5bn to help support unlisted companies cope with the coronavirus crisis, according to the British Business Bank’s latest review.

This record level of 'dry powder' might help to mitigate any impact caused by a decline in new VC fundraising from Limited Partners (LPs) caused by the pandemic, the UK's state-owned small company backer added.

The report, warned, however, that the impact of coronavirus lockdowns on venture capital is likely to be marked given the experience of the 2008 financial crash.

“The 2008 financial crisis affected the availability of finance from banks to companies, as banks rebuilt their balance sheets, whilst Covid-19 has had a large negative shock to both the supply side and demand side in the wider economy.

“As a result of this, the impacts of Covid-19 are likely to be more widespread and having specific impacts on VC backed companies than those of the financial crisis.”

The British Business Bank said it is working closely with the government on the Future Fund as part of a multi-billion pound support package for businesses affected by Covid-19.

The Future Fund provides convertible loan notes (CLNs) for innovative UK businesses between £125,000 to £5mln.

BBB's report said that investment in the first quarter of 2020 was 36% higher than the previous quarter, but there was a 15% decline in the number of deals compared to the previous quarter and an 8% dip compared to the same quarter a year ago.

it also noted that the current health and economic crisis resulting from Covid-19 began to impact on UK SME equity finance markets in the last month of Q1 2020 (March), so the full impact is underreported in the quarterly figures.

"The full impact on equity fundraising is likely to be seen in the number of equity deals and investment in Q2 2020 onwards.

"Evidence from the previous 2008 Financial Crisis suggests equity finance is likely to be particularly affected by the current crisis with significantly lower numbers of equity deals and investment, especially at earlier company stages."

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