Why investors should consider UK high growth small businesses

The Octopus High Growth Small Business Report published last month, shows that UK smaller companies are punching well above their weight. High growth small businesses (HGSBs) create one in every five jobs in the UK. That’s more than 3,000 new jobs every week.

Here’s another impressive statistic: more than a fifth of UK economic growth is driven by HGSBs. That’s despite the fact that less than 1% of all UK businesses fall into the HGSB category.

As the UK’s leading investor in HGSBs, we see first-hand the huge contribution these companies make to the economy. Not only are they creating value for their investors, they’re having a positive economic and social impact.

Defining a ‘high growth small business’

To be defined as a HGSB, a company must have achieved average annual turnover growth of more than 20% over a three-year period. It must also have annual turnover between £1 million and £20 million.

While many of these companies are unquoted, meaning their shares don’t trade on any stock exchange, investors will find several HGSBs listed on the Alternative Investment Market (AIM). Examples of AIM-listed HGSBs include cinema operator Everyman Media Group (EMAN), energy consultancy Inspired Energy (INSE) and Advanced Medical Solutions (AMS), which specialises in state-of-the-art wound care and surgical dressings.

HGSBs are spread across a wide range of sectors. The highest concentration is in the construction sector, closely followed by wholesale and retail trade. There is also a broad geographic spread, with around 60% of HGSBs outside London and the South East.

Driving living standards across the UK economy

Our report finds that HGSBs are more productive than the average UK business. Taking the UK as a whole, the average HGSB is 18% more productive than the UK average business. In some regions the gap is even higher.

HGSBs in Yorkshire and the Humber, for instance, are 47% more productive than the average business for that region.

This matters because highly productive businesses are the cornerstone of economic growth, creating jobs, boosting wage growth and driving higher living standards.

HGSBs are also investing in UK skills, with the report finding that they are more inclined to invest in the people working for them.

In a rapidly changing world, HGSBs recognise they need talent and the right skills to help their business grow and be successful. This investment in skills not only benefits the employer, it delivers huge benefits for employees and for the wider economy.

As the UK prepares for a future outside the European Union, the contribution HGSBs make has never been more important.

Driving returns for UK investors

Highly productive companies aren’t just good for the economy. They also have the qualities needed for growing shareholders’ wealth over time. So for investors comfortable with the higher risks of investing in smaller companies, HGSBs offer great opportunities.

Investor interest in early stage companies has grown in recent years, and there are several ways for individuals to access the UK’s entrepreneurial economy.

As mentioned, there are several AIM-listed HGSBs, and investors can buy shares in those businesses directly.

Alternatively, they can invest in a fund that focuses on UK smaller companies, or through a Venture Capital Trust (VCT).

VCTs, along with Enterprise Investment Schemes (EIS), are government approved initiatives designed to attract investment into UK early stage companies.

They also offer investors the opportunity to invest in a tax efficient way in unquoted companies, as well as those listed on AIM.

Helping HGSBs reach their full potential

The government has done a good job so far of directing investment to UK entrepreneurs, for example by maintaining VCT and EIS tax incentives and by allowing investors to hold AIM shares in their ISA.

However, there remains untapped potential. The Octopus High Growth Small Business Report 2018 contains several recommendations which, if put into practice, should help this important part of our economy achieve even more.

One of these is to let investors hold shares in unquoted companies in their Stocks and Shares ISAs. If just 1% of the funds held in Stocks and Shares ISAs moved into unquoted companies, that would unlock an extra £3 billion to support the country’s most dynamic businesses.

As things stand, HGSBs are already making a vital contribution right across the UK. Now is the time to help them unleash their full potential.

Simon Rogerson is founder and chief executive of Octopus Investments.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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