Scotland's new National Investment Bank is setting the right example
Supporting innovative businesses across the nations and regions is crucial for UK growth. Jason Sinclair reveals why the first financial deal by the Scottish government’s investment bank is a significant move for the future
“The Scottish National Investment Bank will help to tackle some of the biggest challenges we face now and in the years to come, delivering economic, social and environmental returns,” said Sturgeon, describing it as “one of the most significant developments in the lifetime of this parliament”.
The bank aims to invest in businesses and projects that can redress inequality, foster innovation, and help Scotland reach its net zero greenhouse gas emissions target by 2045. Its investment in M Squared is alongside £20m of debt funding from Santander. The lasers and photonics business, which was founded by scientist Dr Graeme Malcolm OBE in 2006, has renewed its focus on the commercialisation of quantum technology. It is leading and coordinating DISCOVERY, a £10m research programme that seeks to overcome technology barriers to commercial quantum computing. It has also forged a £4.6m quantum technology partnership with the University of Strathclyde.
Malcolm says that in addressing “global scientific and technology challenges in fields as diverse as climate change, healthcare, quantum computing and virtual reality”, the company fits the SNIB’s remit to the letter.
“We are at the heart of the UK’s advanced science and technology sectors, sitting alongside world-leading universities and commercial partners,” he adds. “It has become a critical hub of excellence from which we can continue expanding globally. The commercial and technological potential in Scotland is enormous, and with this transaction we have the ideal financial and structural platform to progress and realise substantial growth and launch major new developments.”
Obviously, backing that with investment is crucial to nurturing such businesses. “Science and advanced technologies have a major role to play in Scotland’s future economic prosperity. By increasing investment in research and development with a mission-based approach, Scotland has a real opportunity to actively tackle climate change and benefit from the coming quantum revolution,” says Malcolm.
The SNIB’s investment will fund these opportunities and growth, while Santander’s debt facility underwrites further scaling as well as allowing M Squared’s management team, led by Malcolm, to buy out a substantial part of BGF’s existing shareholding in the firm. BGF retains a “meaningful stake”, having invested a total of £6.7m in M Squared since 2012 over three rounds of funding.
Patrick Graham, head of BGF for Scotland and Northern Ireland, says that the partial exit achieved a strong return for BGF after tenfold growth, with the fund’s “long-term view on investment and supporting growth via follow-on funding” leading to the construction of “a strong platform for businesses such as M Squared to realise their full potential”. He adds that BGF’s “flexible model” also allows them to collaborate with other institutions, as with both Santander and the Scottish National Investment Bank in its first investment.
Patient return
Long hold periods and ‘patient capital’ are, if anything, even more key to the SNIB’s model given the long-term nature of the bank’s socio-economic and environmental goals. It will retain equity stakes for 10 years or more.
Eilidh MacTaggart, the bank’s CEO, has described the deal as “a great fit with our missions. Our investment will create real economic benefit in Scotland.” On the process of bringing Santander on board, she says, “We worked collaboratively to provide an investment solution tailored to M Squared’s needs, and our patient capital approach meant that we were able to take the longer-term view to support the next phase of its growth.”
EY provided corporate finance advice to M Squared, while Deloitte won the race to act for the SNIB in its first transaction. Leading a team of regional specialists in Scotland and sector experts across the UK, Gavin Hood and Roger Mayor of Deloitte’s Edinburgh team say their role was “more about structuring the transaction than a negotiation of terms”.
Approached to provide advice in June 2020, Hood says the deal progressed swiftly after “thinking about how that funding requirement was best structured, reflective of the balance of equity, capital and investment into the business. It was really a classic review of capital structure and thinking about valuation parameters that were appropriate for M Squared.”
Mayor says: “There was an element of showing market norms as well, [and] helping SNIB through that, with it being their first investment on debt funding to equity funding.”
Hood explains: “There was a really robust level of rigour that SNIB wanted to bring to the investment.” This involved bringing in Deloitte experts from valuation and debt capital markets as well as corporate finance. “It was a collaborative transaction and we certainly enjoyed working [with] and providing support to SNIB. That collaborative period of engagement resulted in the transaction being successfully concluded and in part that was down to the quality of M Squared and the style and approach that all parties showed.”
Crystal clear
Malcolm claims that his company makes “the world’s purest light”. The technology can have transformative real-world applications, taking on the climate emergency, improving biomedical imaging and realising the next evolution of semiconductors to “truly unlock the coming quantum age”.
As some private equity houses join quasi-governmental banks and wealth funds in recognising the potential of longer hold periods in greener companies, the financial as well as technological prospects for firms like M Squared are full of potential. Scottish Enterprise and BGF both retain stakes in the company they helped through seed and Series A funding.
Meanwhile, Hood sees the relationship with the SNIB and future innovation-building deals as “a very important one to our firm. We like to think we’ll be able to add value in future transactions. The M Squared transaction is an exciting development and hopefully there’ll be others to follow. We would be delighted to have the opportunity to support them.”
About this article
This is an extract from the full article in the Corporate Financier April 2021 edition - exclusively for Corporate Finance Faculty & Faculties Online members - who can access our highly regarded magazine in its originally designed form, as well as our extensive archive brought to you by the ICAEW Corporate Finance Faculty.
