Why is the UK state investing in £6.45bn Kraken? It doesn’t need public money | Nils Pratley

T.The much-touched state-owned British Business Bank (BBB) ​​has never been an easy organization to understand, but at least its intended role in life can be vaguely grasped. “Our mission is to stimulate economic growth by helping small businesses get the finance they need to start, grow and stay in the UK.” announces website.

Very good. For decades, complaints have been heard about gaps in the funding ecosystem for startups and promising young British companies, particularly in technology-related and life sciences fields or leaving universities. So the existence of a large and significant source of British capital to “collect” private enterprise funds, as politicians like to say, can be applauded.

But then we turn to the development agency’s remarkable move this week: £25 million equity investment in Kraken Technologiesbrilliant software platform spun off from the massive Octopus Energy empire with a view to an eventual stock market listing. Kraken fits that bill as a tech company, but in two other respects it’s miles away from what the BBB usually does.

First of all, Kraken is definitely not a small business. It was valued at $8.65bn or £6.45bn in fundraising. At this level, if it were a company currently listed in the UK, it would enter the FTSE 100 index at roughly 70th place, a few places below Sainsbury’s and a few places above Pearson.

Second, you’d be hard-pressed to argue that BBB’s presence made much of a difference to the success of the broader Kraken/Octopus $1 billion fundraising round led by DI Capital Partners, a US fund. Kraken has $500 million in recurring revenue, so it’s valued at roughly 17 times those revenues. If he can increase equality in such a large group, he will have no trouble finding supporters. BBB’s investment is stated to operate at approximately 0.35% in Kraken. One suspects this is a make-or-break element.

There is also a political angle. Business Secretary Peter Kyle sought to position BBB’s £25 million in the context of Kraken’s choice of eventual listing venue; This is a lively question as the firm describes itself as “headquartered in London and New York”. Kyle told the FT that the money was “not entirely” but part of efforts to keep the company in the UK.

Would £25 million make a difference on that score? Tough. One could say he’s earned “a seat at the table,” as Octopus Energy founder Greg Jackson does, but he’s being generous: 0.35% means more of a stool in the corner. Jackson also described the choice of listing location as a “coin toss” between the UK and the US. Like him, we would like London to get approval, but these decisions always come down to the fundamental question of where valuation could be higher.

BBB explains: “We made this investment with the intention of achieving financial returns. We were introduced to Kraken by Octopus Ventures and given the opportunity to be involved in a deal. It was too good an opportunity to pass up. As the majority of investors are international, this investment gives UK taxpayers access to Kraken, one of our fastest growing companies.”

We can understand that BBB is in this to make money – one has to hope so. But the investment mandate appears to have been quietly rewritten, given that Kraken is described as a small business and ministers try to put certain listing targets at the top.

In last year’s Treasury spending review, BBB’s permanent capital was increased by £6.6bn, bringing the figure to £25.6bn. It was also said that direct investment in a single company, which was previously £15 million, could increase to £60 million. So perhaps we should expect more bets on companies that are well beyond the startup phase and have already done a lot of scaling.

It would be useful to clearly define the new rules. Investing in Kraken may or may not be a profitable use of taxpayers’ money. But given the BBB’s purported goals, this also seems like a case of mission drift.