Brexit may dent UK tech valuations – but investors expect many more deals as sector consolidates

Our recent survey of more than 100 investors in UK technology businesses, including PE, VC and technology businesses, showed that 51% of investors predict that valuations of UK technology businesses will drop over the next 12 months, with 28% predicting valuations will stay steady.

A fall in valuations of UK tech businesses are expected to lead to an increase in deal making in the coming months, as larger corporates seek to purchase innovative tech businesses at lower prices. 44% of investors say they expect to see an increase in M&A activity in the coming year, while only 26% think the number of deals will fall.

Trade buyers, such as technology giants, were considerably more positive than PE and VC investors over current valuation levels. Only 42% of trade buyers believe that valuations are too high currently, compared to 79% of PE and VC investors. As trade buyers often pay in their own shares, they are less sensitive to high valuations than PE and VC investors, who pay in cash.

Recent months have seen some major investments in UK tech businesses. In May, Japanese tech giant Softbank invested more than $500m in London-based virtual reality start-up Improbable, reputed to be the largest Series B investment ever in Europe.

Babylon, a digital healthcare business also based in London, raised $60m in April to allow its 170 artificial intelligence researchers to develop an AI doctor that can diagnose illnesses without human interaction. Investors included Demis Hassabis and Mustafa Suleyman, founders of Deepmind, the AI business acquired by Google in 2014.

Damian Ryan, Corporate Finance Partner, comments: “From a digital standpoint the UK is and will continue to be one of the world’s key digital destinations and hard for investors to ignore. Investors are still looking to make deals, especially when the technology involved has significant commercial potential.

“The tech sector doesn’t have the same investment characteristics as more traditional business sectors – so although Brexit may bring about a slight confidence knock, our research suggests that investors are still keen on backing UK tech companies.”

“For deals with VC funds, investee companies may have to compromise a little more on price to get these deals over the line, but the kind of groundbreaking technology being developed in the UK these days means that deals will be made, whether that’s by investors in the UK, or by US and Chinese players.”

John Stanford, Head of Moore Stephens’ Brexit workgroup adds: “The impact of Brexit negotiations will no doubt cause short-term waves but ultimately it’s clear that the sector has belief in the ability of the UK to ride out the storm, and that the talent and investment will continue to see the UK as being at the vanguard of the global tech space.”

To discuss our research, please get in touch with Damian Ryan or John Stanford.

* Respondents include 102 private equity houses and VC firms, technology businesses or other trade buyers.