Home Business News Rising costs have resulted in a shortening of capital as the number of new investment funds falls to 20-year low

Rising costs have resulted in a shortening of capital as the number of new investment funds falls to 20-year low

by LLB Finance Reporter
4th Jan 24 10:23 am

Last month, the Institute of Directors’ Economic Confidence Index dropped down to -28 from -21 in the previous month, its lowest level since August.

Recessionary fears have been amplified in recent weeks, as monthly GDP was estimated to have fallen by 0.3% in October 2023, following a growth rate of just 0.2% in September.

This comes as the rate of inflation continued to drop to a two-year low following the BoE’s decision to hold interest rates at 5.25% for a third time in December. Claire Trachet, CEO/Founder of Trachet, the UK’s leading business advisory, calls upon the central bank to reassess their macroeconomic strategy for the year ahead in a bid to support a struggling dealmaking landscape.

The news from the Institute of Director’s Economic Confidence Index comes at a time where access to capital continues to be squeezed by the high cost of borrowing.

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Figures from the US financial services firm Morningstar found that 397 UK funds were launched in 2023, down a quarter from the year before and, concerningly, the lowest since 2003, when markets were still reeling from the dotcom crash – a crisis that many attribute to a hawkish increase to interest rates from the Fed. For startups and SMEs holding limited cash reserves, the continual decline of funding options presents an existential challenge as some of the UK’s most promising firms struggle to raise capital ahead of IPOs.

However, hope may be on the horizon. In a poll of the UK’s leading economists, a majority have predicted the BoE to cut interest rates at least twice by the end of 2024 as inflation continues to near its 2% target. According to Claire Trachet, reversing the BoE’s previous hikes to the base rate of interest would help to address funding concerns as the cost of borrowing falls and access to essential capital shores up.

Claire Trachet, CEO/Founder of business advisory, Trachet, said, “The current economic climate is presenting major challenges for companies with limited cash reserves.

“Despite The Bank of England announcing an interest rate hold, when you combine the current rates with an IPO market that shows slow signs of revival, scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding.

“This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and I expect this to result in a growing number of down rounds in the coming year.

“The uniquely favourable conditions experienced in the past decade are unlikely to return, these conditions were defined by a prolonged span of exceptionally low global neutral interest rates, plentiful resources, and limited inflation. Over the last two years however, there has been a steady increase in inflation, requiring a prudent increase in nominal interest rates.

“Therefore, investors and businesses alike should adapt to the current market conditions by focusing on value creation and profitability over headcount growth and valuations.

“However, despite the current environment and the fact that deal volumes decreased by 55% in the first half of 2023 compared to 2022, the UK still remains the most appealing destination for European investment.

“While it may not be the most vibrant global market right now, current conditions in the UK mean that overseas buyers in particular may seize the opportunity to acquire exceptional businesses at discounted prices, sparking a wave of M&A activity in early 2024.”

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