Part 4 of 4 The SaaSpocalypse Series
In Part 4 Neil Blankstone of First Equity Limited joins Richard Angus from Hardman and Co and Doug Lawson from MarktoMarket to discuss the structural challenges facing UK private and public markets and what actually makes investors commit capital in this environment. Neil describes how investors are no longer willing to rely on optimistic forecasts or DCF models alone. Instead, they want valuations supported by real-world evidence including comparable transactions, public market benchmarks and independent validation. Investors are demanding proof rather than projections. Businesses that cannot justify their valuation against actual market evidence are finding it harder to raise capital.
Neil explains that investors are moving away from accepting a single valuation figure and are increasingly focused on sensitivity analysis, downside scenarios and capital preservation. The investment mindset has shifted from fear of missing out to risk management and capital protection.
With capital less abundant and public market valuations under pressure, investors have more negotiating power than company founders. Neil notes that investors have plenty of alternatives and can be highly selective. Companies seeking funding must present stronger evidence, realistic valuations and a clear path to value creation.
Private company valuations are becoming more evidence-based as investors demand market validation, downside protection and realistic pricing.
Watch the whole series.
Welcome to the final part. So, the full series is in the playlist below if you are just joining here. We’ve got Neil Blankstone who is Senior Investment Manager at First Equity Limited, which has been active in London’s smaller company markets since 1987. Neil will be joining Richard Angus and Doug Lawson for a panel discussion. In the discussion, they cover the structural challenges facing UK private and public markets and capital moving to the US.
We’ve also got PISCES, the FCA revised high net worth threshold and the tension between a government that says it wants more investment and a regulatory environment that doesn’t always support it. So, they address the question that matters most to founders and investors right now. In this environment, what actually makes someone commit? So, let’s get into the panel.
Neil Blankstone (00:56)
I’m Neil Blankstone. I’m senior investment manager at First Equity Limited – we were actually the first interdealer broker in London in 1987, and have evolved so that I sit across both private company activity and public markets, particularly UK AIM, working with retail investors as well as advising companies. I suppose what gives us a slightly different perspective on valuation is because in public markets pricing is continuous and constantly tested, whereas, of course, in private markets it’s more episodic. So, I tend to focus on how evaluation translates into something you can actually execute in a transaction, not just what a model implies. That’s also relevant to where I’m a director of two other businesses, one sports related and one media related.
So I think what you’re saying is that basically people have got to get a touch of reality rather than the theory when it comes to looking at businesses. And one of the things we’re finding is there’s a lot more enquiries about private companies, about valuations, about strategy. Do you think from that perspective the market’s becoming more disciplined in the way they look at private companies? Whereas in the past it might a little been a little bit less less obvious how our companies were valued?
Yeah, I’d probably frame it slightly differently. For me, I don’t think valuation is suddenly becoming more disciplined. I think private valuations are actually being brought back towards market reality, particularly after a period where capital was abundant and assumptions were certainly more optimistic. If you look at public markets, especially UK small caps and aim, that repricing’s already happened. So, what we’re seeing now is a convergence
where private valuations are being tested more rigorously against public market comparables as well, actual transaction evidence and also the real cash outcomes. So, it’s less a new discipline, I’d say, a more a reconnection to executable pricing.
So when we’ve looked in the past, in where there’s been more blue skies, shall we say, out there, people have looked to valuations of businesses over a period of time with a fair degree of confidence. What we’re finding lately is that there’s been a massive amount of focus on whether a company has any room risk, any cash running out of money risk or not. Whereas other companies are finding it relatively easy to to obtain money because they don’t need a lot of cash but they’ve got a great goal.
Do you think the world is changing and there’s almost like two variations in the way investors will look at companies, two classes? Or, do you think, it’s all sitting in one button?
At least seeing as a divide in how companies are raising capital. From a valuation perspective, that seems clear. The divide isn’t just between strong and weak anymore. It’s definitely between businesses that can justify their valuations with hard evidence and those relying on sort of narratives. I think investors today are definitely asking the questions are what’s the real comparables? What’s actually traded, what’s been your path to cash generation, that sort of thing. And in that environment, valuations are becoming much more evidence based. So in a UK context where capital has been more constrained, obviously that process is actually more advanced, which is probably why markets publicly like AIM, we’re often seeing more realistic pricing earlier in the cycle.
Doug Lawson (04:26)
Richard, do you mind if I come in closer with a question? I was just wondering, you know, to what extent you think it’s overdone with aim, you know, some of the valuations I look at now are, you know, if you were to look at private market comparisons, they’re, you know, a material discount. And it makes me wonder whether this whole deequitisation story is putting pressure on those valuations. So the fundamentals, it’s not an so much an issue with the fundamentals.
It’s the fact that nobody wants to own UK small cap equities or aim equities.
Yeah, I don’t think it’s a case of nobody wants to own them, Doug. I think it’s – it’s just a case that the – pull to the US has been so great. Yeah. I think regulatory consequences have had a significant impact on this. Obviously, what we’re seeing now is a bit of a conundrum in some ways, with government signalling they want people to mo invest more. Obviously, the London Stock Exchange has suddenly realized, to a large extent, that, hang on a sec, we need to get a bit back. So that they’ve nosyed their way in, I will put it, and I’ve told them this directly, so I’m not saying anything out of turn here, into the private market ecosystem, which actually in the UK works really, really well. If you think of, you know, many of the players that there are around Republic Europe, loads of the venture capital and other funds that are investing privately and very successfully.
That are backed by angel investors and others. Well. So it’s just an environment where the London Stock Exchange has obviously now implemented Pisces with government support as well. There’s a bit of a game being played because they’re giving with one hand, yet, of course, they’re the government at the moment seemingly has or is attacking wealth, probably. I think it’s reasonable to say with a real push to try and balance up income as against wealth and capital. So we’re going through a process in the UK to reinvigorate our UK capital markets. We have fantastic people here with real, real skills. The problem is they’re being almost deployed elsewhere. The attractions for companies is listing valuations are so much higher in the States. Why list in the UK? What we know is there’s a build up of enormous amounts of cash, particularly in the pension fund world, to fulfill the agenda of whichever government is in in in power, deploying that back into UK through infrastructure, tech, digital, and so on and so forth is has to be the aim. So they’re trying to make the headlines about the environment be more friendly. Actually, for retail investors, interestingly, in private investors of course the incentives are all there and Richard sits on the EISA, which obviously is significant, but then we get the FCA creating a two tier situation, coming up with an arbitrary figure of ten million pound as a cutoff point for high net worth and ultra high net worth. So we’re getting a lot of mixed messages. Yeah. And what we know is people are ready and good to go.
What we’re finding in terms of the valuation and the questions being asked of businesses is okay, where are you in the journey? Because cash is king, undoubtedly. It’s the strength. I think the other side is with what happened in the Middle East, that put a lot on hold, as people then reassessed. We’re still unsure how that’s actually ultimately going to play out. So we’re in that sort of where to go from here, so people are gonna be more selective. Thank you.
So I think talking to a number of companies, they have found private companies raising money, maybe using EIS or whatever, recently relatively hard. And yet we think there is money in the background and we have fantastic entrepreneurs in this country with potentially great businesses. What do you think are the key factors that are influencing investor confidence and, importantly, the thing that makes them press the button and make a decision about investing as opposed to saying very interesting, thanks very much and they go away for the time being. Whereas in a bull market, if you didn’t invest, basically the fear of missing out would be your primary thought and you think, well, I better do something. So how do you feel aboutthat whole topic about making decisions?
Yeah, I think again w we you have to look at this as to two very different mindsets – in America, as against what the UK. The UK’s model has been to all about de-risking. So therefore ultimately it’s gonna come down to confidence and something that’s defensibility if you can explain the valuation clearly, ultimately, with credible comparisons, realistic assumptions.
And aligning yourself actually with the actual market transactions – the biggest shift we’re seeing is investors are moving away from accepting a single point valuation instead probably wanting to understand better the range, the sensitivity, and the downside case. At the end of the day, a valuation only really matters if it can be converted into capital or a transaction. And, ultimately, any investor going in wants to know how realistic it is, what I’m gonna get out.
So when we’ve got companies that provide or when you have a company provide you with a business forecast based on a desktop valuation, a DCF valuation, you’ve also got ⁓ and Doug w knows a lot more about this than we do, but there are real transactions taking place which are endorsing what’s actually happening. How much do people look at the future and the theoretical valuation on the business and and the quality of the management as opposed to say, no, this is where we are now and they’re actually looking at the facts in and in the marketplace when they make a decision.
At the end of the day, I think private markets are becoming more institutional in their valuation approach – so from a valuation perspective, I suppose I’d describe it as a shift from model-led to market led thinking. So where historically private valuations were relied heavily on internal models and funding around benchmarks, what we’re seeing now is much greater emphasis on external comparables, transaction data and independent validation. So, partly the structural maturity, but it’s also a function of the environment. And when capital is less abundant, which because of the uncertainties certainly at the moment it is, naturally investors demand the valuation stand up to a real world scrutiny.
So in a sense the buyers, if you like, the investors are sort of in control, whereas in a bull market you could say the companies are more in control in terms of valuation.
Yeah, it’s definitely a buyer’s market at the end of the day, because there’s also going back to Doug’s previous point on AIM and valuations, there’s huge alternatives on discounted valuations that sort of just don’t make sense. So it’s then about an assessment of risk. And what we’ve not got at the moment is a trickle down in the UK, for example, from megacap and ⁓ you know, 250 down into the UK smaller and then private markets as much.
Yeah. Well look, Neil, that was fascinating. Thank you very much for joining us. Unfortunately we’ve run out of time, but we’ve raised a number of points which I think we’re gonna have to discuss in the future. But it was great to get your thoughts.
So, Doug’s point about the shift from model-led to market-led valuation thinking is definitely a good one for us to end on. When capital is tighter and scrutiny is higher, valuations have to be grounded in what the market will actually bear. That’s a discipline, but it’s also more of an honest basis for a deal. So, that’s the end of the Hardman Company Private Company Valuation Forum. Thanks again to Doug Lawson at MarktoMarket and Neil Blankstone at First Equity and Richard at Hardman and Co, you guys have been great. A reminder to everyone, everything discussed across this series is for informational purposes only and does not constitute investment advice. So, if you found this useful, please do subscribe. And if you have topics you’d like to see covered in the next forum, please leave them in the comments below. We’ll be waiting to hear from you. Thank you.
