Rethinking debt in a digital economy

Unlocking growth across the UK’s regions

Ryan Sorby, Partner and Head of the North, Palatine Private Equity

 

Funding decisions always have a huge impact on tech innovation – having the power to set you up or send you back to the drawing board. For many founders, equity has long been the default fuel for growth. But funding models evolve, just like the businesses they support.

Today, more founders are exploring non-dilutive alternatives to fuel growth. Debt, once seen as too rigid or too risky for high-growth tech, is being reimagined — and some of the most ambitious scaleups are leading the charge from outside the traditional South East strongholds.

As one recent advocate at Manchester-based Voly Group, a tech solutions provider to the global yachting industry, puts it, “It was definitely a positive for us to be able to test the debt market rather than go back to our investors,” says COO Steve Evans. “The debt funding helped us accelerate our buy-and-build strategy without diluting ownership.”

The shift reflects a deeper change in how tech companies operate — and how they think about capital.

Most tech businesses — from SaaS and AI platforms to marketplaces and fintech firms — don’t follow traditional business models. They front-load costs, invest heavily in product, people, and customer acquisition, and typically operate with deferred revenue. It’s a model built for scale, not steady-state profits.

This creates cash flow volatility that traditional lenders often shy away from. But it also creates opportunity. Many of these businesses generate predictable recurring revenue, boast strong customer retention, and hold valuable IP — all of which can be indicators of creditworthiness, even if EBITDA is still negative.

“In our case, we were seeing strong ARR but still running at a loss,” says James Holland, CFO of Wakefield-based cybersecurity firm Talion, a BAE Systems spin-out, which has also been backed with debt funding. “We took it as a sign of our growing maturity — it gave our founders confidence that our business plan could support a debt facility.”

In my own experience the key is understanding that growth investment — when well executed — isn’t reckless spending. It’s deliberate, measured, and often the clearest sign of future success.

Context is a powerful part of the dynamic as, clearly, no form of funding exists in a vacuum. Every innovation ecosystem has both strengths and weaknesses – and when it comes to tech funding some founders did raise capital on strong valuations during the pandemic boom. The correction that followed has left some facing difficult choices: raise down rounds (where the pre-money valuation is lower than its post-money valuation from the previous funding round), accept dilution, or slower growth.

In this environment, debt has become a valuable bridge. It enables founders to stay on track, avoid raising equity at compressed valuations, and retain optionality for future rounds or exit events. More importantly, it sends a signal: this is a company mature enough to handle leverage, confident in its model, and disciplined in execution.

One of the enduring challenges here is how to value intangible assets. Code, customer contracts, data, and brand don’t show up on a balance sheet like property or equipment — but they’re often far more valuable. It follows that progressive lenders are starting to look beyond physical collateral, focusing instead on contracted revenue, product defensibility, market position, and the quality of customer relationships.

As tech funding models evolve, so too should the geography of innovation. Yet despite a wealth of talent and intellectual property across the UK, the funding landscape remains heavily skewed towards the South. Many regions already host outstanding tech businesses, and while there have been concerted efforts to promote regional balance, disparities in investment, innovation funding, and business growth persist—and in some cases, have deepened.

Across all data sets, London and the South East dominate in both deal count and total investment value. It means Northern England, the Midlands, South West, and devolved nations lag significantly in both equity and debt availability. There is increased recognition of the issue, but limited impact so far in terms of redistributing capital.

Before Tech Nation ceased operations in March 2023, its data consistently showed that over 60% of UK venture capital went to London-based companies. Manchester, the UK’s largest regional tech hub, attracted less than 10% of the capital raised annually by companies in the capital.

Through the lens of AI, the picture is even more stark. Tech Nation’s 2024 report, UK Tech in the Age of AI, provides detailed insights into the regional disparities, highlighting significant imbalances in investment, market value, and the distribution of high-growth companies across different regions.

Greater London received an estimated $3.6 billion in AI investment in 2024 alone — around 71% of the UK’s total AI funding over the past five years. London is home to 1,603 AI startups, 33 “soonicorns”, and 14 unicorns. In contrast, the North West — despite strong growth — hosts 84 AI startups, 2 soonicorns, and 1 unicorn.

These disparities point to a need for more targeted regional investment. Without intervention, many promising companies in regions like the North, Midlands, South West, and devolved nations may struggle to access the funding needed to scale.

At Palatine, we launched our £80 million Growth Credit Fund in January 2024 precisely to address this gap. Our focus is on fast-growth B2B companies in tech sectors such as AI, SaaS, cyber, and fintech across the UK’s regional ecosystems. Early investments have supported Northern businesses like Voly and Talion — both examples of the talent and ambition that exist far beyond the M25.

This isn’t about replacing equity; it’s about expanding the funding toolkit. When structured around tech realities — with revenue-based facilities, milestone-linked tranches, and flexible drawdowns — debt becomes a strategic lever, not a liability.

“If you’re a growing business eyeing an exit, having some debt in the business — and showing you can service it — puts you in a strong position,” says Steve Evans of Voly. “It’s a sign of maturity.”

James Holland agrees: “The Growth Credit raise was far less distracting than an equity round. The finance team led the raise while the leadership team stayed focused on delivery. Palatine’s tranche-based structure allowed us to draw down flexibly and keep our investors aligned.”

Ultimately, UK tech companies deserve funding options that reflect how they operate. Almost eighteen months after launching our Growth Credit Fund, we’ve completed five deals and are building a strong pipeline for 2025. The demand from innovative, regionally based tech firms is clear — and we’re excited to back more of them on their growth journey.