Tech and venture lead the way in May's post-Brexit vision

In January, Theresa May confirmed what government officials had been hinting for months: that the UK is likely to pursue a so-called "hard Brexit" in its forthcoming negotiations over the country's exit from the European Union, abandoning the nation's membership of the single market. While this sparked concerned responses from major employers in the financial services and automotive sectors, the impact on the technology sector is less clear.

According to the most recent Venture Pulse report published by KPMG Enterprise, the UK venture space remained highly attractive to investors in Q4 2016. This is despite the increased suggestions that the country is likely to find itself outside of Europe's internal market, which comprises all EU member states and EFTA's three members of the European Economic Area: Norway, Iceland and Liechtenstein. Much of the venture market's resilience can be attributed to the UK government's signals that it will look to support the technology sector after withdrawal from the EU.

Statement of intent
Indeed, in November's autumn statement, chancellor Philip Hammond revealed that the government is to invest £400m in venture capital funds via the British Business Bank. The announcement came shortly after the prime minister launched a review panel focusing on supporting the growth of startups to be chaired by Permira's former chairperson and managing partner, Damon Buffini.

More recently still, in January, May reiterated this commitment to the tech space when launching her industrial strategy, with a focus on technical education and sectors including artificial intelligence, smart energy, robotics and 5G mobile technology.

Software products account for 59% of all private equity and venture tech deals since 2012, according to unquote" data

One thing is for certain: if the government is to carry through with its current plans to leave the internal market, it will have to decrease Britain's reliance on the financial services space. A report from March 2016 by trade body TheCityUK found the financial services sector contributed nearly 12% of the country's economic output. Meanwhile, PwC estimated at the time that as many as 100,000 jobs in the UK's financial sector could be lost post-Brexit. Recent signals are that such a scenario is indeed unfolding, as JP Morgan, Lloyds, UBS, Citigroup and HSBC all indicated they are setting in motion plans to move parts of their operations out of London.

The decision to rebalance the economy towards technology could be a wise one by May. A 2016 report by the government's Tech City programme found digital technology industries are growing 32% faster than the rest of the UK's economy. Additionally, software products account for 59% of all private equity and venture tech deals since 2012, according to unquote" data. Unlike the financial services sector, these products do not depend on passporting. They are also unlikely to be impacted by customs bottlenecks to the same extent the automotive sector might.

Crucially, private equity players are well positioned to capitalise on the development. Technology deals accounted for some 41% of all expansion and early-stage investments made in the UK between 2012-2016, according to unquote" data. Evidently, a steady stream of businesses are reaching a level of maturity that is suitable for private equity backing. Furthermore, given such business owners are familiar with venture capital fund managers, it is likely many will be open to the possibility of progressing alongside private equity backers.

Talent threat
However, the technology sector itself is not entirely immune from the threats posed by Brexit. Indeed, while Richard Muirhead, general partner at early-stage VC OpenOcean, welcomes the prime minister's recent commitment to science and innovation, he emphasises the importance of being able to recruit and retain international talent. Furthermore, he argues additional public investment will be required in order to replace EU funding that he says "will most likely be withheld in the upcoming negotiations".

The significant contribution of the European Investment Fund (EIF) to UK venture vehicles over the years has made the programme a crucial backbone for the industry, to the point that strict restrictions, or even a sudden interruption of funding, could prove disastrous. Indeed, according to figures issued by the body, EIF committed some €2.3bn to UK funds between 2011-2015.

The years ahead are highly likely to see an extensive reshaping of the UK economy and subsequently its private equity deal-making landscape. Should the country proceed along a hard Brexit route, the tech sector looks most likely to emerge as the lynchpin of both.

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