Private equity can help the knowledge economy in Liverpool drive the city’s recovery from COVID-19, writes Chris Ryan, of Grant Thornton

Rewind just five years and you could count the number of private equity-backed businesses in Liverpool on one hand.

Many entrepreneurs had misconceptions about PE, perhaps driven by outdated notions about asset stripping which belong in the 1980s. Until comparatively recently, many management teams viewed a trade sale or merger as their only route to an exit, and banks as the main source of capital. Investment houses, for their part, were focussed on the Manchester market.

But that focus has shifted in recent years – and with good reason. Liverpool has developed world-leading credentials in knowledge-led sectors including medtech and digital.

Underpinned by the cutting-edge research and development taking place in the city’s universities, and the establishment of a distinct innovation district in the Knowledge Quarter, businesses in these industries are thriving.

Liverpool’s economy has diversified; from almost exclusive dependence on tourism and leisure, to one turbocharged by the knowledge economy. This has been a major driver in increased deal activity. The return on investment for backing a winner in these industries can be huge.

Many of these promising businesses are early-stage and, due to the nature of their industries, pre-profit. They need seed funding and growth finance to weather the cash burn rate that accompanies early years of research and development.

These requirements have dictated investor interest. In the early days of Liverpool’s evolution into these sectors, this was predominantly from venture capital and angel investors.

But as businesses in these industries have scaled, they have attracted interest from private equity firms too. Today, all of the active mid-market North West PE houses have investments across the city-region; many in digital health and tech.

And for medtech businesses, 2020 could prove a ‘now or never’ year. Pre-pandemic, interest and adoption of medtech was growing but consumer attitudes and NHS procurement practices meant the sector had not yet enjoyed the same success as in other markets like the US.

COVID-19 has changed all that. Liverpool boats a raft of promising medtech businesses, several of which have been directly involved in the pandemic response. Management teams will astutely recognise there has never been a better time to invest and grow a healthtech business in the UK.

The opportunity, however, arrives during a challenging economic climate. Many traditional lenders have even less appetite, or capacity, to fund these growth ambitions. Private equity is ideally placed to fill this shortfall, just as it did post-financial crash of 2008.

And while high-growth sectors may offer the highest multiples, private equity houses are not exclusively focussed on them. As most will tell you, they are sector agnostic and back good businesses and good management teams.

Many of the city’s struggling leisure and hospitality operators are, fundamentally, very good businesses. Those which have taken on Coronavirus Business Interruption Loan (CBILS), or lending from other sources, simply won’t have the capacity to take on further debt to fund a swift recovery.

But with a coronavirus vaccine mooted for Q1 2021, and the prospect of reduced lockdown restrictions, PE investors are poised to offer growth capital and support – vital lifelines for many businesses in the industry.

As Liverpool looks to build back better from COVID-19, the role private equity can play should not be overlooked. Recovering sectors and white-hot emergent industries will attract investors for different reasons.

But combine this with ambitious management teams in the city who are now more receptive to private equity, and the deal market looks primed for a busy New Year.