UK Venture Capital fund performance holds up despite adverse economic headwinds, finds latest research by the British Business Bank

• Performance of UK VC funds remains steady having weathered the economic storm faced by global financial markets
• UK VC funds continue to perform well compared to their US counterparts but top UK funds lag behind top US funds
• Exit opportunities and fund raising conditions deteriorate
• British Business Bank supported fund performance continues to rise as funds mature

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 ^{Read footnote text 3} ) 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 and fund raising conditions, which reflects changes in the economic landscape compared to 12 months ago. While the majority of fund managers surveyed (64%) 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 fund raising conditions, compared to the previous survey. Only 7% of fund managers thought current fund raising conditions were good or very good compared to 79% in last year’s survey and no fund managers thought conditions had improved compared to a year ago, but 64% 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, and 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 ^{Read footnote text 4}  (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, but 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 and 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 where 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 ^{Read footnote text 5} , 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.

British Patient Capital (BPC) was established in June 2018 and 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 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.

• ^{Return to footnote location 3}

  Total Value to Paid In (TVPI) is the ratio of the current value of remaining portfolio investments within a fund, plus the total value of all distributions from exits to date, relative to the total amount of capital paid into the fund to date.

• ^{Return to footnote location 4}

  Distribution to Paid-In (DPI) is a measure of the cumulative distributions returned to the investor from portfolio company exits relative to the total amount of capital paid into the fund to date.

• ^{Return to footnote location 5}

  ECF funds with a 2006-2019 vintage year