AI could add £630bn to UK economy, suggests new review

BY Fraser Tennant

An increase in the use of artificial intelligence (AI) could bring major social and economic benefits to the UK and add £630bn to the UK economy, according to a review published this week.

In ‘Growing the Artificial Intelligence Industry in the UK’ – an industry-led independent review carried out on behalf of the Department for Digital, Culture, Media & Sport and the Department for Business, Energy & Industrial Strategy – the case is made for the UK to “become the best place in the world for businesses developing and deploying AI to start, grow and thrive, and realise all the benefits the technology offers”.

Among the key factors which have combined to increase the capability of AI in recent years include: (i) new and larger volumes of data; (ii) a supply of experts with specific high level skills; (iii) the availability of increasingly powerful computing capacity; and (iv) a continuing fall in the barriers to achieving performance.

“The UK possesses an enviable reputation for excellence in AI with cutting-edge innovation, world-class universities, a thriving start-up scene and significant investment growth,” said Jon Andrews, head of technology and investment at PwC. “But in order for the UK to realise the potential gains from AI and keep up in an increasingly competitive landscape, we need to ensure that AI systems are adopted in a responsible way so that every part of society can reap the benefits. We also need to create the right environment for existing and new businesses to innovate and make the most of the product, productivity and wage benefits that this technology can bring.”

The review makes a number of recommendations (18 in all), including: developing data trusts to improve trust and ease around sharing data; making more research data machine readable; supporting text and data mining as a standard and essential tool for research; increasing computing capacity for AI research; recruiting skilled experts to develop AI; and establishing an AI Council to promote growth and coordination in the sector.

Overall, the review recommends that government, industry and academia needs to work together to keep the UK among the world leaders in AI.

Mr Andrews concluded: “It is great to see the review address practical actions the government can adopt in order to support companies in confidently implementing AI, providing secure and safe access to data, developing the research sector, and significantly bolstering the number of people being trained to work in the field.”

Report: Growing the artificial intelligence industry in the UK

Global Logistics expands with $2.8bn European acquisition

BY Richard Summerfield

Global Logistics Properties, which manages around $39bn of logistics assets in Asia-Pacific and the Americas, has expanded into the European logistics market by acquiring Gazeley for around $2.8bn from Brookfield Asset Management. The transaction is expected to be funded by about $1.6bn of equity and $1.2bn of long-term, low-cost debt.

Global Logistics itself is in the process of being taken over for $11.8bn by a leading Chinese private equity consortium which includes Hillhouse Capital and the Hopu Investment Management Company, and is backed by senior executives from Global Logistics. The consortium, which is known as Nesta, will take Global Logistics private in Asia's largest private equity buyout of the year. According to Global Logistics, the deal for Gazeley is not expected to impact the timeline for the company’s privatisation.

In a statement announcing the Gazeley deal, Ming Z. Mei, co-founder and chief executive of GLP, said: “We have been looking to expand to Europe and this portfolio presents an attractive entry point given the quality and location of the assets. This transaction adds a premier operational and development platform for us in Europe and is part of our long-term strategy to expand our fund management business.”

Gazeley’s existing management team, as well as the company’s brand, are both expected to be retained when the deal has been completed.

Global Logistics will be acquiring a considerable asset portfolio in the deal. The company will gain around 32 million square feet of property currently owned by Gazeley, which is concentrated in Europe’s key logistics markets, with 57 percent in the United Kingdom, 25 percent in Germany, 14 percent in France and the remainder in the Netherlands, according to Global Logistics. Europe has long been a focus for Global Logistics; indeed, the company has been talking about expanding into the market for more than 18 months.

The company, much like the wider logistics industry, has seen a rising demand for facilities, driven by a boom in e-commerce. Earlier this year, private equity group Blackstone agreed to sell European warehouse firm Logicor to China Investment Corp for $14.4bn in a deal which further reinforces the burgeoning interest in the global logistics sector.

News: Global Logistic Properties buys European logistics firm for $2.8 billion

InsurTech investment increases in Q2 2017 as reinsurers wise up to opportunities

BY Fraser Tennant

Global investment in InsurTech rose sharply in Q2 2017 as reinsurers become more open to its potential for transformation rather than disruption, according to a report out this week.

In ‘InsurTech – the new normal for (re)insurance’, PwC notes that investment in InsurTech by global insurers, reinsurers and venture capital firms surged by 247 percent to $985m, compared to Q2 2016 ($398m). The first three months of 2017 saw $283m of InsurTech funding.

Furthermore, the report predicts the rate of funding and investment will continue at a similar level and highlights an uptick in interest in InsurTech from the reinsurance industry as sentiment turns from fear to bullishness, and from scepticism to collaboration.

“A change has happened in insurance and it is hugely encouraging to see both insurers and reinsurers increasingly view InsurTech as an enabler rather than a competitor,” said Patrick Maeder, EMEA insurance consulting leader at PwC. “This uptick in enthusiasm is vital to ensure the industry engages with innovators to help shape its own success. Neither party can survive this wave of disruption on its own and collaboration between experienced industry players and new ideas and technology will result in new products, reduced costs and more engaged customers.”

Although 82 percent of reinsurance companies say they plan to partner with InsurTechs, including a new wave of start-ups, to explore how new technologies and talent groups can help them play a leading role in transforming their industry, concern about disruption and loss of market share remains. “InsurTech innovators have rapidly established themselves as the backbone of innovation in this industry but reinsurers should not be overly concerned about startups directly disrupting their product offerings,” continues Mr Maeder. “They should instead focus on what makes their business unique and where they see future growth coming from.”

The report also notes that startups are focused less on disrupting the entire industry and more on redesigning specific areas of the value chain, which provides reinsurers with an opportunity to foster a culture of collaboration, embrace the innovative potential within their businesses and ultimately modernise the industry.

Mr Maeder concluded: “Reinsurers then need to find the best way of directly working with this new wealth of tech-savvy talent to place themselves at the heart of what will undoubtedly be a transformation for their business and the wider industry.”

Report: ‘InsurTech – the new normal for (re)insurance’

Tough time ahead for financial services

BY Richard Summerfield

As higher inflation impacts UK households, and as a decline in real wage growth continues to take hold, the financial services sector is in line for a tough 2018, according to the latest EY Item Club Outlook for Financial Services.

The report notes that inflation will peak at around 3 percent in the second half of the year, while real household disposable incomes are forecast to decline by 0.2 percent in 2017 - the first drop since 2013. This fall in household income is likely to decrease the demand for mortgages and other 'big ticket' items and general insurance in 2018.

The combination of higher inflation and decreased real earnings will likely lead to an increase in consumer credit next year, as households look to compensate for any shortfall with increased borrowing. The amount of consumer loans will grow from £204bn in 2017 to £206bn in 2018 before rising to £212bn in 2019 and £218bn in 2020, according to the report.

EY UK financial services managing partner Omar Ali said: "Even modelling for a Brexit transitional deal, the outlook for 2018 remains tough for financial services as the impact of higher inflation is felt by households up and down the country. Business lending, mortgage lending and general insurance look set to be the hardest hit. Despite warnings from the Bank of England and some high-street lenders, the only type of lending that is expected to grow in 2018 is consumer credit."

Indeed, the pressures applied to consumer spending in 2018 could dramatically affect the UK’s short term economic prospects. With consumer spending accounting for 60 percent of the UK’s GDP, any significant reduction in consumer spending could have a knock on effort on GDP. With pay growth expected to remain subdued in the short term at least, real earnings are expected to fall by 0.5 percent this year.

The report predicts business lending will rise to £435bn by 2020, but only if the UK is able to strike a transitional deal during Brexit negotiations with the EU. Mortgage lending, however, will fall to £1.1 trillion in 2018, compared to a forecast £1.2trillion in 2017, though it is expected to climb slightly in 2019 and 2020.

Report: EY ITEM Club Outlook for Financial Services

Biotech struggles continue despite attracting finance

BY Richard Summerfield

The global biotech industry has seen continued investment in new treatments despite experiencing a number of strong headwinds, such as a pull back from capital markets in the US and the EU, lower valuations and increased pressure from payers, according to the 31st annual EY report 'Beyond Borders: Staying the Course'.

The report notes that revenue for US and Europe-based biotech companies reached $139.4bn in 2016, an increase of just 7 percent on 2015. Furthermore, net income dropped 52 percent year-over-year to 7.9bn and financing dropped 27 percent to $51.1bn in 2016 – the first decline in four years.

Regardless of these struggles, early biotech financing has remained promising, investment in seed and series A biotech venture rounds totalled $3.6bn in 2016, a record 36 percent of the $10bn of venture capital raised. This figure is higher than the previous 15-year average of $1.3bn. In 2016, IPOs in the biotech space endured a difficult period, however.

Dealmaking remained active in 2016, with acquirers taking advantage of reduced biotech valuations. Mega deals also played a key role: five biopharma mega deals accounted for three-quarters of all M&A value in the industry in 2016. As a result average M&A value for deals with announced terms was more than $1bn for only the third time in the past decade. Overall, 2016 deal activity was down 12 percent year-on-year to 79 deals, however, M&A volume remained above the past decade’s average of 65.

Research and development (R&D) spending reached a record high of $45.7bn, up 12 percent on 2015. Pamela Spence, EY global life sciences leader, said "The biotech industry's financial commitment to R&D, while impressive, needs to be coupled with efficiency improvements to achieve better returns and ultimately to drive greater affordability of its products. With pricing pressures expected to escalate, firms will need to incorporate new digital and artificial intelligence technologies into their traditional drug target selection and overall R&D processes to achieve those returns or risk being outdone by firms that do. Furthermore, the payer-driven slowdown in revenue growth industry-wide provides further evidence of the need for companies to accelerate their shift in business models to fee-for-value from fee-for-service. Fundamental to the success of this transformation will be to form data-focused partnerships with the digital technology companies increasingly entering the health care space."

According to EY, the US is the “biggest source of innovation” in the R&D field, though China and the UK are also making impressive strides.

Report: Beyond Borders: Staying the Course