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UKCloud acquired: Troubled government cloud provider receives funding lifeline

UKCloud has declined to reveal the terms of its acquisition by an investment company run by its own chairman, prompting questions about how this deal will close the £30m funding hole revealed in its most recent set of accounts

UKCloud claims its acquisition by an investment company, headed up by a member of its own senior leadership team, should allay the concerns of its customers about the future of its business.

The troubled public sector-focused sovereign cloud provider has been acquired by an investment company called Hadston 2, which was incorporated in November 2020 and is run by UKCloud chairman Jeff Thomas – who is a long-standing investor in the business.

The acquisition is also backed by existing UKCloud investors, Digital Alpha Advisors and BGF. 

The terms of the deal have not been disclosed, nor is it clear how the acquisition will address a £30m funding shortfall that came to light in its most recent set of financial results.

The company declined to provide Computer Weekly with exact details about how the acquisition will remedy its need for funding, which has been ongoing since September 2020.

“The acquisition provides funding through to profitability and beyond,” a company spokesperson said. “The commercial terms of the deal are not being disclosed, but UKCloud’s Audit Accounts will provide further detail when filed in due course.”

In a statement, announcing the acquisition, the company said the deal will pave the way for the firm to expand its product portfolio, embark on additional strategic partnerships, accelerate the development of its health and defence-focused cloud platforms, and create new jobs.

“This investment is a significant milestone for UKCloud, funding the business through to profitability and accelerating the development of industry-leading capabilities to help organisations of all sizes embrace the obvious benefits of cloud and digital transformation,” said UKCloud CEO Simon Hansford.

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Thomas, who has served as a director of UKCloud since November 2020, has previously invested millions of pounds in the company through Hadston 2 – having provided the firm with a £5.5m “convertible loan” during the 2019-2020 financial year, which is due for redemption in late 2022.

“The funding [from the acquisition] provides a strong foundation on which to assemble a portfolio of innovative businesses promoting the ethical and sustainable use of data to drive positive change in our communities and economy,” said Thomas, in a statement.

“Organisations and governments increasingly share a belief in these crucial outcomes and I am deeply excited to unveil more information about our growth plans and new direction in the very near future.”

News of the acquisition follows a difficult few years for UKCloud, as it has seen its share of the public sector market erode since several of the US public cloud giants – namely Amazon Web Services and Microsoft – opened UK datacentres in late 2016.

UKCloud was – at one time and until 2017 – the third-biggest provider of cloud services to the public sector – according to the government’s own G-Cloud framework sales figures. Its 2017 financial results saw the firm post a profit of £4.4m

The following year, however, UKCloud reported a downturn in profit, revenue and customer usage, with its 2018 accounts attributing these downbeat trends to the increased competition the firm was facing from the US cloud giants.

Equity investment

The company secured a £15m equity investment from Digital Alpha Advisors in March 2019, to support the continued buildout and development of its platforms. This deal included a commitment for the investment firm to provide a further £10m in funding to UKCloud, should its “SECRET” platform support a revenue of £625k in any three-month period, as detailed in its 2019 financial report.

Computer Weekly understands this revenue generation target was not achieved, and the remaining £10m in funding was not handed over as a result.

Digital Alpha Advisors confirmed to Computer Weekly in December 2021 that it remained an investor in UKCloud, but said in a statement that “following discussions, there was a mutual agreement not to provide further investment to the company”.

Additionally, the firm was forced to make 25 members of staff redundant in August 2021, shortly before the publication of its most recent set of accounts revealed in September 2021 the firm had plunged further into the red during the 12 months to 31 March 2020.

These accounts saw the firm post a loss of £17.9m before going on to reveal the firm’s need for a £30m funding injection to cover its debts and to ensure it could continue trading.

According to company sources, the firm’s senior leadership team had previously briefed its staff – during an “all-hands meeting” in August 2021 – that it was on the cusp of securing an investment worth up to £80m to remedy its financial difficulties.

The accounts also confirmed the company had been in pursuit of new sources of investment since September 2020, which is when the firm’s board appointed a team of advisors to oversee the search.

Solvency concerns

A Computer Weekly investigation also exclusively revealed in November 2021 that government departments were being advised to stop hosting data and workloads in UKCloud’s datacentres due to concerns about the firm’s solvency.

The concerns are known to have originated from the Cabinet Office, with sources close to UKCloud claiming the edict was linked to the fact the firm’s 2019-2020 accounts were filed nine months late.

The round of redundancies that affected the firm in August 2021 included individuals working in UKCloud’s sales, marketing and compliance functions, as well as its healthcare-focused division, UKCloud Health.

It has also since come to light that former National Crime Agency CIO Gerry Cantwell, and current head of the firm’s defence-focused arm, UKCloudX, has resigned and is due to leave the firm in late January 2022 to take on a new position at BAE Systems.  

Also set to depart in due course is Ellie Robson-Frisby, the director of marketing for UKCloud, UKCloudX and UKCloud Health.

The company moved to play down these departures, in response to questions from Computer Weekly about what these staffing changes mean for the future of UKCloudX, which was launched in June 2018 to help the firm court cloud buyers in the defence and national security sectors.

“Gerry will be replaced and UKCloud will be investing significantly in all of its businesses, including UKCloudX, now that investment is secured,” the company said, in a statement. “[UKCloud] hires talented individuals and, inevitably in a hit recruitment market in the tech sector, some will leave. Ellie leaves with our best wishes and her team have stepped up until a replacement is hired.”

Positive partner and customer response

While the company declined to share details with Computer Weekly about how much money the acquisition will give it to invest in new endeavours, a company spokesperson said the response to the news from its partners and customers has been positive.

“UKCloud has an existing and vibrant future, and will be making significant investment in its platform, services and people over the coming months,” the statement read.

“Naturally, we have spoken to many partners and customers over the past five days and have received overwhelmingly positive feedback and commitment from them, including new orders.”

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