New research from the British Business Bank finds that fund valuations for recent fund vintages have held up in the year to 31st March 2022.
According to the British Business Bank’s latest report, UK Venture Capital Financial Returns 2022, UK-VC funds with a 2008 to 2013 vintage have generated a pooled Total Value to Paid In Capital (TVPI) multiple of 2.20, which is 0.11 points higher than last year, demonstrating that UK-VC fund valuations have so far been resilient to the adverse headwinds affecting global financial markets.
Deterioration in exit opportunities and fund raising conditions
Although UK-VC market performance remained steady until the end of March 2022, the Bank’s engagement with 14 UK fund managers suggests a deterioration in exit opportunities. This is in addition to fundraising conditions, which reflect changes in the economic landscape compared to 12 months ago.
While the majority of fund managers surveyed (64 per cent) still see there are good quality deals in the market, nearly three quarters of fund managers reported exit conditions have deteriorated over the last year, providing further evidence of difficult environment for portfolio company exits.
Fund managers were also less optimistic about current fundraising conditions, compared to the previous survey. Only seven per cent of fund managers thought current fundraising conditions were good or very good. This is compared to 79 per cent in last year’s survey. No fund managers thought conditions had improved compared to a year ago, but 64 per cent thought they had worsened.
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 compared to UK-VC funds. Analysis of data within this report suggests that this is not the case. Returns continue to remain very similar between these two geographies since 2002.
Overall fund returns for UK VC funds with 2002 to 2017 vintage years show a pooled Distributions to Paid In Capital (DPI) multiple of 0.84 and a pooled TVPI multiple of 2.27. US funds of the same vintage generated higher pooled DPI multiples of 1.19. However, the US pooled TVPI multiple of 2.31 is very close to the UK’s figures. UK’s top-performing VC funds generate high returns but performance lags behind the top US funds
VC market returns are driven by the performance of outlier funds. Previous reports identified that the top-performing US funds have substantially higher TVPI multiples than the top UK-VC funds. This remains true in the latest data. The UK top performing one percentile funds with a 2002-2019 vintage generated TVPI return multiples of approximately 14, compared to around 29 in the US. However, the UK’s TVPI multiple is an improvement on last year’s 11.
Outside of the top two percentile funds, UK upper decile funds outperform the US, showing UK funds have more consistent performance. Whilst TVPI multiples include unrealised assets, whose values may not be realised, a similar picture is seen for DPI multiples. Here, the top percentile UK-VC funds generate a return of six, but US-VC funds generate a DPI of over 22.
The performance of these outlier funds makes a disproportionate contribution to total market returns. The improved performance of these top UK funds suggests that UK-VC could be an attractive asset class for investors.
British Business Bank funds performance continues to rise
As the largest UK-based LP investing in UK-VC, the British Business Bank is committed to being transparent on the performance of the VC funds in which it has invested.
Returns on British Business Bank supported funds continue to rise as funds mature, finds this year’s report. VC funds supported by the Enterprise Capital Funds (ECF) programme are outperforming the market in terms of their realised returns. For ECF-backed funds, the pooled DPI multiple is 0.65 overall, but 0.78 for other LPs due to the prioritised return structure. Both these DPI multiples are higher than the wider UK-VC market DPI multiple of 0.53 for funds of the same vintage years.
Financial returns compared to other regions
British Patient Capital (BPC) was established in June 201. It seeded with funds from the Bank’s VC Catalyst programme which operated between 2013 and mid-2018.
VC funds in BPC’s portfolio with a 2013-2019 vintage have generated a pooled TVPI multiple of 1.94. This is higher than a year ago (1.73). But it is lower than the wider UK-VC market multiple of 2.19 for funds of the same vintage. This can be partly explained by the BPC portfolio being less mature than the wider VC market, reducing BPC’s relative performance.
Matt Adey, director of economics at the British Business Bank, said:
“The continued financial returns of UK-VC relative to counterparts in the US are promising. UK-VC continues to show good performance. While it is encouraging that returns have remained resilient, the economic headwinds facing global markets are reflected in our fund manager engagement results. The impact will be seen in future data.”
The Bank has published a report looking at financial performance of UK-VC funds for four years in a row. This report includes the fund performance data of 167 UK-VC funds with a 2002-2020 vintage. It draws on data from both the British Business Bank and commercial data providers including PitchBook and Preqin. This in addition to a survey of UK-VC fund managers. This makes it the largest source of information available on the performance of UK-VC funds.
