Calum Paterson, the founder and managing director of Glasgow-based Scottish Equity Partners, recently announced his decision to step back. His insights at The Business Dealmakers’ Breakfast were poignant and informative.
Since the event, Paterson has announced that he will take on the role of chairman of Heart of Midlothian FC.
“I do think the investment landscape in Scotland has changed very significantly. If we go back to late 1990s and early 2000s, when I was involved in setting up our firm, there was a lot happening. There was a high volume of investments across all sectors and industries. You had 3i, a leading UK venture capital company, and other venture capital and private equity firms and, of course, the banks. Because of that change we’ve had to look further afield.”
One of Scottish Equity Partners’ greatest success stories was its early support for Skyscanner and the subsequent sale in 2016 to C-trip, now Trip.com, for more than £1.4bn.
“It was very small for us but we could see the significant value-adds from us to Gareth [Williams] and the other founders was to discourage them from exiting too early. Shortly after we invested there was a fairly significant offer but we could see the potential, so we encouraged the funders to strengthen the business, and to build the senior team out and to really scale the company.”
Paterson is proud of this great tech Unicorn built and grown in Scotland.
“The interesting thing for the Scottish economy was rather than that simply disappearing into the arms of some foreign buyer [C-trip was Chinese], the company remains headquartered in Scotland, operating independently in Edinburgh and Glasgow, with 1,500 employees globally. This is quite potent and we need to get more of these companies to scale, even if they’ve been sold one day. If they are sold too early, the chances are there is not an awful lot left.
“The big change for us as Scottish Equity Partners over the last 15 years or so has been a successful pivot away from that unpredictable early-stage model to growth equity for companies that are a bit more established and looking to scale.
Like all major technological shifts, there will be winners and losers in society
“Two significant trends in our industry, which have influenced the strategy that we have developed over a decade or so, is the trend towards scales, so the emergence of huge mega firms and funds which in terms of their core characteristics are like investment banks, which is more than the classic model of private equity and venture capitalist.
“In part, a competitive response to this change and the growth of the very big firms, has been the rise of specialisation, which enables you to build significant knowledge in a particular market segment of expertise. Then to have that idea of ‘repeatability’ in taking the success and learnings from one company and applying it to others.
“This brings the whole question of knowledge and value-add. For us, specialisation has been about working with enterprise software companies across the UK and Europe, and within that category of enterprise software we are focusing on key verticals.”
AI is driving a monumental increase in spending and investment while it is creating significant growth opportunities.
Paterson says: “Looking at AI today, through our lens it is having a profound and arguably unprecedented impact. I think like all major technological shifts, there will be winners and losers in society. We’ve seen that in technological change over the centuries.
“However, this is the reality for business. Some businesses will fall on one side of the AI line, while others will be on the other side. We spend a lot of time when we are speaking with companies to try and find out which side of the line they are on.”
Paterson adds: “While we’re delighted to support Scottish companies, for our business to be successful we’ve had to look much further afield.
“For Scotland there is a challenge. From what I can see there is a very vibrant early-stage start-up ecosystem, with lots of small companies being set up. Of course, to be our kind of companies for the future, we need them to be set up in the first place, but too few companies go on to become global category leaders. Or indeed to raise substantial capital for growth.”
In Scotland, early exits are too common, Paterson says. People will grow business to a certain stage and then get an offer that is difficult to resist.
“When you’ve put everything into your business, and you’ve all your eggs in that basket, and you get a half-decent proposal to what could be a life-changing amount of liquidity, you are naturally quite tempted by that,” says Paterson.
“The problem for Scotland in that regard is that too few companies stay the course. Once they’ve been sold and changed owners, particularly at early stage, it is hard to see much benefit coming in the long term for the economy.”
