UK venture capital funds perform well compared to their US counterparts but…
New in-depth research from the British Business Bank, UK Venture Capital Financial Returns 2023, finds UK venture capital funds continue to perform well overall compared to their US and European counterparts, but top performing UK funds lag behind leading US funds.
Historically, US VC financial returns were perceived by many commentators to be substantially higher than UK funds. However, across the 2002-2018 vintage period, these results show that UK VC funds generated a pooled Total Value to Paid-In Capital (TVPI) multiple of 2.06, compared to 2.14 for US funds and 2.04 for funds in the rest of Europe. This indicates that the UK is performing in line with these other leading markets overall.
This year’s report however confirms that there is still a performance gap between the top UK and US funds. Across the 2002-2021 vintage period, the top 1% of US funds generated TVPI multiples upwards of 9.4, compared to multiples upwards of 7.6 for equivalent UK funds.
Over the short term UK VC returns have declined slightly, as some fund managers write down valuations
The report also analysed a sample of 130 UK funds that reported performance data in both 2022 and 2023. It found that the pooled TVPI *value fell by 9% from 2.18 to 1.98, with the median falling by 11%. This decline indicates that UK fund managers are writing down valuations as market conditions have become more challenging.
Matt Adey, director of economics at the British Business Bank, said: “The continued good performance and financial returns of UK venture capital are promising, showing that long term returns are in line with other major markets such as the US and Europe, and performing well compared to other alternative asset classes. While our survey results show a recent deterioration in exit opportunities and fundraising conditions over the last 12 months amid a challenging market environment, it is encouraging that some fund managers expect valuation declines to begin stabilising over the next year’’.
Private Equity and VC produce the highest returns on average when comparing asset classes, though the top performing VC funds can generate higher gains
The report also provides data on the returns of UK VC compared to other alternative asset classes. UK Private Equity (PE) and VC funds demonstrated the strongest performance across 2002-2018 vintage years, with median TVPIs of 1.78 and 1.67, respectively. Infrastructure has been the third best performing asset class, with a median multiple of 1.57, followed by real estate (1.30) and private debt (1.29).
For VC in particular, financial returns are more variable given the greater risk involved in investing in high-growth companies. However, strong performing funds can achieve significantly higher returns than in other asset classes. For example, the upper quartile TVPI multiple for VC across this period was 2.54, exceeding each of the other asset classes including PE (2.18) and infrastructure (1.85).
Exit opportunities and fundraising conditions deteriorate, while the majority of market participants expect valuations to decline or stabilise over the next year
The Bank’s survey of 58 UK fund managers found a deterioration in exit opportunities and fundraising conditions over the past year. Almost two thirds (64%) thought conditions for raising a new fund were either poor or very poor, compared with 29% last year, while 72% of managers saw the availability of successful exit opportunities as poor or very poor.
This year’s survey evidence points to a continuation of subdued dealmaking activity. Almost half (48%) of respondents reported that the pace of their investment has decreased due to the changing economic conditions, while a similar share (45%) said that they have prioritised existing portfolio companies compared to new investments.
Looking ahead, future changes in valuations will be an important indicator of market recovery, with 41% of fund managers expecting average valuations to remain in line with current levels over the next year. However, as a slightly higher share of fund managers believe valuations are likely to fall further (33%) than increase (22%), there may be some more room for valuation declines before the market recovers.
*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.
