Northern powerhouse: the next Silicon Valley?

Alice Murray
25 February 2015

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At the start of the year, chancellor George Osborne outlined the importance of creating a тnorthern powerhouseт to rebalance the UK economy. But can government schemes genuinely boost investment activity and create opportunities for private equity? Alice Murray reports

Following Osborne's speech, there has been a flurry of activity in the north-west of England, with the government announcing an extension to Manchester's Growth Deal, which will see a further £56m invested in the city, having already committed £476.6m to the region.

As part of the announcement, the business secretary, Vince Cable visited Manchester's Business Growth Hub – similar to Tech City in London – to meet businesses receiving support from the centre. When asked about the prospects for the local M&A market, Cable pointed out that deals had not taken off as predicted last year – noting the failed Pfizer/AstraZeneca deal. He urged corporates sitting on large cash piles to put that money to work, rather than returning it to shareholders.

While a mega corporate deal, such as that proposed by Pfizer and AstraZeneca, would have undoubtedly created a plethora of smaller corporate spinouts for private equity to feast upon, Cable's outlook is somewhat gloomy given the rude health of the local private equity scene.

Manchester and the wider north-west region provide a second home to an impressive array of private equity houses, including Palatine Private Equity, LDC, Primary Capital, Equistone Partners Europe, Inflexion Private Equity, Livingbridge, Montagu and ECI Partners. Furthermore, NorthEdge Capital Partners raised a £225m fund focused purely on transacting in the region.

A quick glance at some of the start-ups that have come out of Manchester, including AO, The Hut, OnTheBeach, LateRooms.com, Music Magpie, WeBuyAnyCar and Misguided, reveals the tenacious entrepreneurial spirit of the region.

Future-proof
With the recently-secured extension to Manchester's Growth Deal, the city is clearly looking ahead to the future and building a vibrant investment market. Sir Howard Bernstein, chief executive of Manchester council, has been a major driver in fuelling up the northern powerhouse. With plans to take over the Manchester Science Park to create an incubator for university spinouts, the city's prowess in synthetic medicine looks set to explode. Manchester has proved its excellence in this field by being home to the wonder material graphene.

It is difficult not to compare activity in Manchester to efforts made in 2011 to create a start-up scene in London akin to Silicon Valley – the UK's very own Silicon Roundabout. While Tech City has clearly attracted a wave of entrepreneurs, the feeling of excitement and general enthusiasm is lacking when compared to the current activity in Manchester. For those currently transacting in the north-west, the energy and buzz in the region is palpable.

This has not gone unnoticed by private equity firms operating in each corner of the country, with reports of many houses regularly travelling into Manchester to get a slice of the action.

The key difference between what is happening in Manchester and Tech City in London is need. As the capital city houses some of the world's biggest and most valuable companies, the need for a vibrant start-up scene is not desperate. A better comparison for Manchester is Berlin, where there is a real importance for nurturing entrepreneurs and innovation.

But what is of most significance is the region's open nature. Once viewed as a closed shop reserved solely for local buyers, recent deals highlight that it is all for the taking. As 2014 drew to a close, Riverside, a US-based house with operations in London, fought off competition to secure its investment in Warrington-based Brookson Group, a contract accounting business. Furthermore, US firm KSL Capital Partners acquired Village Urban Resorts, also based in Warrington, from former parent De Vere Group.

While politicians push plans to boost growth in the north-west in order to rebalance the UK economy, the private sector is contributing the most important ingredients – energy, drive and confidence.