Life sciences venture capital funds outperform overall market in realising returns for investors
New in-depth research from the British Business Bank, UK Venture Capital Financial Returns 2024, finds that the realised returns of venture capital funds in the life sciences industry outperform other sectors. For 2002-2019 vintages, life sciences funds across the UK, US and Europe reported a pooled Distributions to Paid In capital (DPI)[1] multiple of 1.14 – higher than the overall market figure of 1.02. The pooled Total Value to Paid-In capital (TVPI)[2] for life sciences funds (1.76) was below the wider market multiple of 1.99, though companies in this sector often need to complete significant milestones, such as clinical trials, before receiving mark ups in their valuation.
Green tech sector recovered from downturn
As the green tech sector has recovered from its downturn in 2010, the returns of more recent vintages have been closer to the wider market. For 2014-2022 vintages, green tech funds produced a pooled TVPI multiple of 1.55 – significantly higher than for vintages since 2002 and more in line with the wider market (1.64). While this second wave of green tech innovation is still relatively immature in comparison to other successful VC-backed sectors, this recent performance data suggests that the industry is now producing more commercially viable propositions which are seeing increases in valuations.
UK VC returns were above the US and the rest of Europe for older vintages, and are in line with or slightly below for more recent vintages
Historically, US VC financial returns were perceived by many commentators to be substantially higher than UK funds. However, for 2002-2019 vintages, UK VC funds generated a pooled TVPI multiple of 1.87, compared to 2.01 for US funds and 1.96 for funds in the rest of Europe.
Looking at specific vintage year cohorts, UK funds outperformed other markets during the vintage period after the dot-com bubble. UK funds established across the 2002-2007 vintage period outperformed both the US and the rest of Europe on both DPI and TVPI measures. For more recent 2014-2022 vintages, while portfolio valuations are continuing to be marked down amid more challenging market conditions, the UK’s pooled return (1.64) is in line with the US (1.63) but below the rest of Europe (1.76).
Over the short term, company valuations continued to decline during 2023/24, leading to lower TVPI return multiples
To assess changes in fund performance over the past year, the report also analysed a sample of 139 UK funds that reported the latest returns data in both 2023 and 2024. The UK’s pooled DPI for this sample of 0.37 remained in line with last year’s figure (0.36), suggesting that a lack of exit opportunities remain a key challenge for fund managers.
The UK’s pooled TVPI multiple fell from 1.73 to 1.61 in 2024, which represented a similar annual decline to last year’s report and shows that fund managers are continuing to mark down the value of their portfolios. This change in TVPI is in line with the equivalent decrease for rest of Europe funds (from 1.87 to 1.75), while UK funds were slightly more resilient than those in the US – for which the pooled TVPI multiple fell from 1.82 to 1.66.
Matt Adey, senior director of economics at the British Business Bank, said: “This year’s report finds that the UK market continues to generate similar returns to the US and rest of Europe on some measures, while also slightly underperforming on others. While our survey results show that the majority of fund managers believe that fundraising conditions are challenging, it is encouraging that they are also expecting exit opportunities to improve over the next year.”
Fundraising remains a key challenge for GPs, though there are some initial signs of improved exit conditions and expectations for higher valuations
The Bank’s survey of 42 UK VC fund managers found that a significant majority of fund managers continue to experience challenging fundraising and exit environments. In total 69% of general partners (GPs) reported that the current state of the market for raising funds was poor or very poor (up from 64% last year). These difficult conditions have led to a quarter of GPs pushing back plans for raising a new fund.
While 62% of fund managers believed the availability of exit opportunities was poor or very poor – a 10% decrease from 2023 – GPs are more optimistic about a future recovery in this area of the market. Looking forward, nearly three-quarters of fund managers are expecting exit conditions to improve over the next year, with none expecting them to become worse.
The relative performance of British Patient Capital-backed funds has improved over the past year
The report also includes performance data for the VC funds that have been backed by the Bank’s Enterprise Capital Funds (ECF) programme and its commercial subsidiary, British Patient Capital (BPC).
Funds in the ECF portfolio have generally outperformed the wider UK market. ECF funds with a 2006-2022 vintage reported an overall pooled DPI of 0.60. As the Bank receives a lower share of potential profits as part of the programme, the DPI for other LPs in these funds was higher at 0.70. For comparison, both of these figures exceed the wider market’s pooled DPI of 0.43.
BPC-backed funds with a 2013-2022 vintage reported a pooled DPI multiple of 0.20, in line with those across the wider market (0.19). When including unrealised value, BPC funds’ pooled TVPI of 1.40 is lower than for funds across the wider UK VC market (1.65) – though this gap has narrowed from 0.29 in last year’s report. The median TVPI multiple is also now higher for BPC-supported funds (1.33) than for funds across the overall market (1.28), further showing an overall improvement in BPC’s relative performance compared to last year.
Responding to the report, Michael Moore, chief executive of the British Private Equity and Venture Capital Association (BVCA), said: “The British Business Bank’s report demonstrates the vital role that venture capital plays in the UK economy.
“This report shows how challenging it can be for venture capital firms to raise funds – Currently, just 3% of worldwide pensions investment into UK led growth equity and venture capital is from UK pension funds. This emphasises the importance of initiatives linked to the pensions investment review which aim to catalyse institutional investment into UK venture capital and growth funds, and the businesses they invest in.”
