February 2017

NEWS , • Asian capital think- ing twice before com- mitting more money to the US – Much of the sentiment and rhetoric since the US election should concern any Asian corpo- rate. There is a feeling Asian cor- porates have benefited too much from US trade, and this needs to be redressed. Irrespective of how true or not, the fact is Asian corpo- rates and investors are likely to be less welcome in the US in the next four years than in the last eight. They are also less needed. Signif- icant private equity and the pros- pects of offshore corporate cash flowing back into the US offers the prospect of huge private liquidity. Finally, US tech valuations aren’t exactly cheap: they are at all-time highs in many sectors. • There is a 25% discount on UK tech – A $/£ rate near $1.20 is near unprecedented on a trade-weighted basis. While currency doesn’t drive basic in- vestment decisions, it does make previously-logical UK investments 25% cheaper than a few months ago. U risks that drive this de- pressed rate are of little conse- quence to many Asian investors; they are interested in leveraging UK tech assets in Asia, not else- where in Europe. Hence the 25% discount is real for them. • The number of ‘grown up’ Euro- pean companies is far greater than 10 years ago – there are nearly 50 European tech ‘unicorns’ valued at $1B+, up sharply from even five years ago. European unicorns are much better developed than US counterparts; revenue aver- ages $300m+ versus $100m+ for US unicorns. While these groups aren’t precisely comparable, the difference is indicative of a Euro- pean trend away from hype valu- ations, resulting in performance driving value more than just poten- tial. We see this mind-set having created dozens of sizeable and mature tech assets in Europe, making that sector much more in- vestable than a decade ago. • European late stage growth capital is a fraction of what’s needed, leaving a huge gap in the market – while a similar number of tech companies get initial fund- ing in both Europe and the US, the funding gap is yawning in later stage rounds. For Series C and later rounds, total US capital in- vested in tech companies in 2016 was $26B, in Europe that number was only $2B. As more European companies mature, this gap will be closed by Asian investors, as nature truly abhors a vacuum. The buy-to-let mort- gage market could blossom in 2017 if greater lending sup- port is provided to Special Purpose Vehicles (SPVs), according to State Bank of India UK, a customer-focused bank that values fairness and transpar- ency. The bank is hoping to support professional landlords over the year through the provision of SPVs, which carry significant tax benefits relative to standard buy- to-let (BTL) mortgages for some customers. SPVs’ increasing popularity (1) follows what many landlords have regarded as heavy regula- tion of the BTL mortgage market in 20152 and earlier in 2016.3 As a result, UK landlords have increasingly turned to SPVs to mitigate the rise in BTL costs. Yet only 16% of all BTL mortgages are currently available to inves- tors through SPVs.4 Only a small proportion of providers offer SPV mortgages as other lenders are likely to shun the SPV market due to a perceived higher risk of lending, increased complexity and cost of underwriting SPV ap- plications. Many mortgage providers charge a higher rate for SPV mortgages than their standard BTL mortgag- es: the average BTL mortgage rate on the market is 3.3%,5 1% less than the average rate of 4.3% for SPVs. However, SBI UK’s av- erage SPV rate is 3.22%,6 only 0.50% higher than its BTL rates. Mr. Sanjiv Chadha, Regional Head for SBI UK said, “we believe landlords will increasingly use a limited company structure for their property portfolios and this trend cannot be ignored. As such we are keen to support those invest- ing through SPVs and the mort- gage brokers serving them. ‘SBI UK is willing to work with any professional landlord that is in- terested in an SPV, whether they are opening one for the first time or remortgaging an existing SPV. However, if they are considering borrowing through an SPV for the first time, they must be a profes- sional landlord with a proven track record. After all, an SPV doesn’t have experience, but a landlord does and that is what we will as- sess as a part of our underwriting process.’ There are several benefits to landlords investing through an SPV or limited company struc- ture; for example, income taken as dividends is taxed at 10%, which is much more efficient than income tax, especially for higher rate earners. Multiple sharehold- ers can appear on an SPV’s title deeds, which makes it easier to manage share of profits and pro- portions of ownership. SBI UK has effective but not overly on- erous underwriting requirements: it requests that investors have a required minimum income from their properties of £25,000. For more information, visit: www.sbiuk.com Special Purpose Vehicle’ Mortgage Market Could Blossom in 2017 N • Many emerging European tech leaders will need funding in 2017/18 - We see dozens of Eu- ropean tech companies that have been funded recently to achieve scale quickly, not necessarily to break-even. The result is that we believe an unprecedented number of quality tech companies in Europe will need at least one more significant funding round (e.g. $30m+) from 2017 on- wards. While European VC has increased significantly in recent years, the capital requirements for these companies is happening faster than the local VC industry can mature to handle it. This funding gap will be filled in part by greater Asian capital. • Asian corporates have already bought platform assets in Europe – 2015-16 saw unprecedented Asian M&A of platform assets in Europe which will be expanded through follow-on investment and acquisition. From ARM plc being acquired by Softbank, to Midea’s investment in German robotics firm Kuka, to Tencent acquiring Supercell, down to a broad range of $100m+ acquisitions complet- ed or in progress, Asian corpo- rates are building long-term as- sets in Europe which will support further capital inflow. • Much of European tech is al- ready more international than the US, making adaptation for Asian markets easier and less risky – Because of smaller home markets European tech companies build platforms and models which are inherently more international than US counterparts. For example, in fin-tech European companies build multi-currency and multi-lin- gual capability in their products day one. European tech companies think nothing of creating multiple overseas operations early in their development, something US com- panies have little need to worry about. This results in European tech targets that are inherently much ‘safer’ to internationalise, in turn increasing their attractiveness. Last year Asian capital into Eu- ropean tech reached an all-time high of $58B. We believe 2017- 18 could see a doubling of that, entirely transforming the Europe- an tech ecosystem. We believe ‘looking East’ from 2017 could be the greatest ever endorsement of the quality and value of European created-tech- nology, and accelerate the devel- opment of the tech ecosystem far faster than it could ever develop by ‘looking West.’

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