The investor in university spinouts wants to take on external limited partners to raise more money for companies seeking scale-up capital.
The investment firm founded by the universities of Leeds, Manchester and Sheffield in the north of England, aims to take on external investors in the second half of next year to help it fund spinouts beyond series A.
The investment firm, whose shareholders include blue chip companies and pension funds, will change to a structure that allows external investors, known as limited partners, in order to boost the amount of capital it has to support the most successful spinouts in its portfolio that are seeking later stage funding.
CEO Duncan Johnson says changing Northern Gritstone’s structure means it will be able to raise capital more quickly than if it had to rely on tapping its balance sheet for more money.
“We have a massive opportunity set that we can’t fund at the moment because of how much money we want to deploy to different bits of portfolio construction,” says Johnson. “So, we’ve got ourselves regulated to give us the optionality to allow us to manage more money in different formats that suit different funders, and also gives us more firepower.”
Northern Gritstone secured a final close of £312m ($400m) in November 2023, which included more than £150m from local and regional authority pension funds in the north of England. Johnson says the firm could raise an extra £180m through a general partner-limited partner structure to bring it up to £500m. This total is what it originally aimed it raise when it launched in 2021.
Some of Northern Gritstone’s existing shareholders are interested in injecting more capital as limited partners, but the team has also been in talks with external investors that are interested in joining as LPs now that the firm is more established. “This is the first opportunity to go back to those guys and say, we think we have proven it out. You are going to get a cherry-picked scale-up portfolio.”
The investment firm has seen interest from corporate investors as well as funds located in the Arab states of the Gulf. These include family offices as well as sovereign wealth funds such as the Kuwait Investment Authority.
The management team is waiting until next year to raise more capital because it thinks market conditions will be better then, and it will have had more time to prove itself, says Johnson.
Northern Gritstone has invested in 24 companies since its launch, primarily in spinouts from the UK universities of Leeds, Sheffield and Manchester, which each have a small shareholding in the company. It was launched to fill a gap in venture capital funding for spinouts emerging from the north of England which are often overlooked by investors focused on the so-called Golden Triangle region of Cambridge, Oxford and London.
Northern Gritstone invests in three main areas: life sciences, deep tech and health tech. It invests in pre-seed through to series B and beyond. Companies in its portfolio include Iceotope, a precision immersion cooling technology for data centre servers, and Floreon, a bioplastic made from crops such as corn and sugar cane.
Recent investments range from seed to series D. In June it made a £850,000 seed investment in Cavero Quantum, a University of Leeds spinout, which has developed encryption technology for secure key generation. In March, it invested £5m as part of series D fundraise in Phagenesis, a medical device company specialising in the treatment of swallowing disorders.
Northern Gritstone recently partnered with Deeptech Labs, a UK venture capital fund and accelerator, to launch NG Studios, a 10-week accelerator programme to support its spinouts in business creation.
Johnson says some of its portfolio companies will soon have to raise between £10m and £50m in later stage funding rounds. “We would like to participate strongly in some of those rounds, but we can’t do that from the balance sheet. If you’re an LP, this stuff has already been incubated by us,” says Johnson.
“We would like to manage more money to go into those businesses to help them scale and move forward.”
- GCV is an investor in Deeptech Labs
