The latest British Business Bank market research finds that higher company valuations, combined with strong exit activity in 2020 and 2021, has contributed to a material uplift in venture capital (VC) financial returns since the Bank’s last published report.
According to the Bank’s latest report, UK Venture Capital Financial Returns 2021, UK VC funds with a 2008 to 2013 vintage have seen an increase in their pooled Distributions to Paid In Capital. Over the same time period, their pooled Total Value to Paid In Capital multiple has increased by 0.28 points, from 1.81 to 2.09 in 2021. UK venture capital has also performed strongly over the longer term, with pooled TVPI multiples above 2 for most two-year periods since 2002.
The overall improvement in UK fund performance was confirmed by the Bank’s fund manager survey which shows fund managers have positive views on VC market conditions. Nearly all surveyed fund managers reported positive views on the quality of investments available (97%) and current exit conditions (93%), with the majority (59% and 72% respectively) reporting an improvement on these measures over the last year. However, a high proportion of fund managers (59%) reported high levels of competition for deals, which may suggest these high valuations might not be sustained until exit.
UK VC funds continue to perform well compared to their US counterparts
Historically, US VC financial returns were considered by many in the VC industry to be substantially higher than the returns of UK and European funds. Analysis of data within this report suggests that this is not the case, and returns are very similar since 2002.
Overall fund returns for UK VC funds with 2002-2016 vintage years show a pooled DPI multiple of 1.01 and a pooled TVPI multiple of 2.08. US funds of the same vintage generated higher pooled DPI multiples of 1.12, but the US pooled TVPI is 0.11 points lower than the UK’s.
In particular, the UK performs well across the earlier 2002-2007 post-dotcom bubble vintage years where UK pooled DPI and TVPI returns are, respectively, 0.20 points and 0.35 points higher than in the US.
UK’s top performing VC funds reporting very high returns
Overall VC market returns are driven by the performance of outlier funds. The top one percentile of UK VC funds with 2002-2019 vintage generate TVPI multiples of 11, an improvement from multiples of around six a year ago, although this still lags similar US funds, which have TVPI multiples of 26.
While the US still outperforms the UK for the top 3% of its funds, the UK has made a substantial improvement since 2019, when the top 8% of US funds had higher TVPIs than UK funds. The UK’s distribution of TVPI multiples follows an almost identical shape to that of the US, up to the third percentile. The improved performance of these top UK funds suggests that UK VC could be an attractive asset class for those LPs currently investing or considering investing in US VC.
British Business Bank funds performance
British Business Bank-supported funds are largely performing in line with the wider VC market. Pooled TVPI multiples for private sector LPs in the Bank’s Enterprise Capital Funds programme is 1.99, are comparable to the 2.01 generated by funds in the wider UK VC market. This provides strong evidence of the effectiveness of this policy intervention which aims to increase the supply of equity capital to high-potential, early stage UK companies and lower barriers to entry for fund managers looking to operate in the VC market.
Matt Adey, Director of Economics at the British Business Bank, said: “This report provides as comprehensive a view as possible of the performance of the UK venture capital market. The report shows that UK VC continues to have good performance relative to the US and has the potential to be an attractive asset class for LPs. It’s encouraging that fund managers are overwhelmingly positive about market conditions with a sharp increase in performance in the last year.”
UK Venture Capital Financial Returns 2021 is the British Business Bank’s third annual report examining the financial performance of UK VC funds. The report covers 154 UK VC funds with a 2002-19 vintage and draws on data from both the British Business Bank and commercial data providers including PitchBook and Preqin, as well as a survey of UK VC fund managers. This provides a robust and thorough view of the asset class and its performance, covering 38% of the UK VC market.