Winning ways

Several US corporate investors have taken stakes in Scottish companies such as fantasy sports company FanDuel

An enviable talent pool and an outstanding support infrastructure within Scotland’s cities make the country hugely attractive to global investors

by Colin Cardwell

Click to access article as a .pdf

In an increasingly challenging global economic climate, businesses with growth ambitions have realized that the domestic marketplace is not necessarily enough to sustain performance or, crucially, to grow. For many companies, and regardless of size, exporting products or services to overseas markets is now an imperative, rather than an option.

On the flip side of the coin, it’s equally important to attract inward investment – which is a primary focus of Scottish Development International, the international development arm of Scottish Enterprise, the umbrella Scottish economic development agency, which also includes Highlands and Islands Enterprise.

Scotland’s cities continue to play a key role in the global development of its growth sectors, such as life sciences, financial services, fintech and food and drink – but what are the key attributes that have made Scottish cities such an appealing prospect for a growing number of overseas investors?

For Stephen Trombala, a corporate finance partner at leading Scottish law firm Shepherd and Wedderburn, who advises both funders and corporates, there are two major factors: the country’s talent pool and the support infrastructure available within these cities.

“If I look at the investments that have been made in Glasgow, Edinburgh or Aberdeen in recent years it’s principally overseas investors who are selecting these cities for these reasons,” he says.

Trombala points to the acquisition of Edinburgh-headquartered Wolfson Electronics by Texas-based Cirrus Logic in 2014 – a deal he says that was attractive as a result of the available local talent in semiconductors; and similarly, the sale of Dunfermlinebased retinal imaging company Optos to Nikon the following year.

Stephen Trombala says that investors see strength in numbers and that Scotland has a high profile in FDI

“Private equity, large corporates and sophisticated investors have also taken stakes in a number of indigenous, high profile Scottish businesses, such as the online travel booking company Skyscanner and the web-based fantasy sports game company FanDuel, which Shepherd and Wedderburn has advised since its formation in 2007,” he says. “These investors see the talent pool in Scotland as a great investment opportunity.”

Trombala adds that an additional factor attracting global investors to Scotland is price arbitrage. “The costs of operating in Scotland are generally lower,” he says, “whether employing people, buying property or basic infrastructure costs – and that can be a decisive factor for businesses for which a lower cost base is an important part of the mix.”

The country’s primary overseas investor, he says, is the United States, though Japan and other Far Eastern countries also have an important and growing presence. “The businesses they acquire guarantee a high level of skills and talent – and a good business that they can scale up through their own channels,” he says.

Trombala says these businesses combine a high-quality, relatively low-cost talent pool – notably when compared with the south east of England – alongside a proven track record in a host of key attractive investment sectors such as medtech, pharmaceuticals, software and semiconductors.

“Look at Edinburgh University and its world-renowned School of Informatics. If you are a US investor in the informatics space, you will recognize the city as being a global center of excellence – and that can’t help but assist Scotland in attracting inward investment,” he says.

Trombala also points out key decision-makers talk to each other, and Scotland will invariably feature in those conversations – thus raising the country’s profile as a target for investment.

“JP Morgan, for example, has a big project development operation in Glasgow (it chose Glasgow from 30 potential locations for its fintech center) and it’s inevitable the bank will be speaking about is experience in Scotland with others in the global financial services sector and telling them about the significant talent pool we have in Scotland.

“Investors see strength in numbers; if they decide to come here they know they are not acting in isolation because they can see other big players, in some cases their main rivals, active in the sector already.

“This, in turn, serves to de-risk the conversations around where to invest. Add to that a proven track record of successful inward investment and a stable resource base, and Scotland comes into focus as a very attractive place for them to invest.”

While Scotland already has a raft of sectors providing attractive opportunities to global investors, Trombala says that there are also other exciting areas primed for expansion, notably in Scotland’s blossoming digital technology sectors.

“Any activity involving a significant volume of data is a potential growth area,” he says. “There are a lot of very good data analytics companies based in and around Edinburgh developing tools and services designed to enhance the business performance of other companies, notably in financial services, the digital games sector and the media. This links back to Edinburgh’s historic expertise in informatics and the processing of large volumes of data.”

There is, he adds, another growing body of work in Artificial Intelligence (AI) in and around the Scottish capital: “Businesses there are looking at AI solutions to address a range of specific issues, and that again is potentially of interest to foreign investors.”

Trombala also highlights further prospects in the information technology (IT) space.

“When we get the eventual rollout of 5G, the fifth-generation mobile network, coupled with widescale adoption of ‘internet of things’ connectivity, this technological leap forward will undoubtedly prove a further fillip to those businesses already offering data analysis and system optimization services.”

Trombala points to the German conglomerate Siemens and its keen interest in smart cities – which has already led to major investment in Scotland. Smart Cities is a coordinated initiative through which millions of pounds are being invested in Glasgow, Edinburgh, Aberdeen, Perth, Stirling, Dundee and Inverness to create efficient infrastructure, support urban planning and improve the population’s well-being – harnessing insights taken from sophisticated data analytics.

“There is a lot more investment of that type coming down the track and as the internet of things begins to roll out there will be a number of businesses that will develop those technologies and developments in exciting ways,” says Trombala.

Life sciences is another sector where Scotland is known globally as a center of excellence. “Again, we have that great track record and world-renowned expertise – so it’s not surprising that overseas companies want some of the action,” explains Trombala.

Japanese company Kwoya Kirin International acquired Scottish pharmaceuticals firm ProStrakan in 2011, and Scottish medical device developer Aircraft Medical, which makes video laryngoscopes to help medics safely insert breathing tubes, was bought in 2015 by the Minnesota company Medtronic.

“Investors can see the talent and ingenuity in these companies,” says Trombala. “There’s only ever going to be an increasing spend on medcare and healthtech and as a country we are very good at supporting and growing these businesses, so there is good reason to be optimistic about the future.”

Turning to his particular area of expertise, offshore oil and gas, Trombala adds: “This is a global asset class and the challenge for the UK sector is that it competes for investment with similar assets in other parts of the world. However, again, investment into Scotland has several significant advantages: a local, highly-skilled workforce; an impressive level of experience; and a stable regulatory regime underpinned by an increasingly encouraging fiscal regime.

“While the north and central North Sea are now mature provinces, these areas in turn represent what are potentially hugely valuable decommissioning opportunities in the coming years – opportunities that will require a resourceful, skilled talent base. Our expertise in oil and gas has long been exported around the world and the sector encourages even micro businesses to trade globally.”

For investors looking to Scotland there are a number of unknowns, not least the potential impact of UK’s exit from the European Union. There is also the question of whether recent US tax changes will encourage investors there to deploy more capital at home instead of overseas.

Trombala remains confident, believing Scotland will continue to attract investment, despite ongoing uncertainty. “I can look across all sectors – including energy, life sciences, ICT and financial services – and see foreign direct investment across all of them. And that’s very encouraging.”