Life Sciences: UK funding continues to come under pressure

The UK funding market is currently ‘cautious’. The past year has been particularly challenging; businesses have had to navigate high interest rates, higher than normal inflation and extreme economic uncertainty. This has dented the confidence of investors and lenders, leading to a resurgence of funding discipline. Investors and lenders are now evaluating opportunities more rigorously, with an increased focus on profitability and financial sustainability.
 

The most creditworthy funding opportunities are in high demand, but they are also sensitive to price shocks and face intense competition. Lenders are looking for businesses with healthy balance sheets, a proven track record and scope to grow. For those less creditworthy, raising funds can be challenging as lenders are hesitant to take on the risks associated with other lenders’ problematic loans.
 

Private equity under pressure to deploy capital
 

There is a significant amount of capital available for investment, particularly in the private equity (PE) industry. Last year saw PE scale back on deal activity, leading to increasing pressure to deploy the built-up capital. It’s estimated that PE has close to $1tn in dry powder globally, following record capital raises in 2022. While much of that is aimed at the very large end of the market in the US, a substantial and historically high sum of $70-80bn is based in Europe and aimed at the middle market.

But PE investors are also targeting their investments carefully. They are concentrating on core, resilient industries with strong growth prospects and are increasingly bringing in operating partners as they place a greater emphasis on value creation.
 

The strong ecosystem in Cambridge
 

Companies based in Cambridge are in a strong position as they get to benefit from a robust and supportive ecosystem, universities that are driving world-leading research, and a history of successful startups, spinouts and unicorns. All of which contribute to its appeal as a destination for investment.

The region is home to a plethora of high-quality businesses operating in attractive industries, including technology, healthcare, life sciences and MedTech. These industries are at the heart of creating innovative products and services that contribute to tackling global issues and making an impact on people’s everyday lives.

Northern golden arc

This life sciences cluster stretches from Liverpool through Cheshire into Yorkshire and the Northeast. It is home to a significant number of MedTech and pharmaceuticals companies, including AstraZeneca, AbbVie, Baxter, Teva, and ThermoFisher, which have manufacturing facilities in this region. Further to the government’s 2023 launch of the Liverpool region as a second investment zone, the region continues to attract major investment, including £450m from AstraZeneca to support future vaccine development.

Financial markets remain cautiously optimistic
 

As the country recovers from a mild technical recession at the end of last year, the good news is that the worst appears to be over. A stabilisation in the economy, falling inflation and expected interest rate cuts in the summer will help boost overall confidence and should stimulate lending activity.
 

This suggests a cautious optimism in the market, with potential for improvement as economic conditions become more favourable. However, the challenges for those less creditworthy remain a concern. As appetite among lenders improves, this will drive optimism from both buyers and sellers, and is likely to prompt an uptick in the deal market, which has been notably subdued following a surge in activity during the pandemic.
 

The UK also has a general election on the horizon, but it remains to be seen what impact this might have on the financial markets, and in turn, lending appetite.

To discuss how we can support your life sciences business, please contact Laragh Jeanroy or Graham Bond.

Laragh Jeanroy, Co-head of Life Sciences, RSM UK
T: +44 1284 763311 | laragh.jeanroy@rsmuk.com

Graham Bond, Co-head of Life Sciences, RSM UK
T: +44 151 600 2600  | graham.bond@rsmuk.com 

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