UK VC funds catch up to their US rivals

UK venture capital funds rose sharply over the past 12 months and have gained ground on US counterparts, a report reveals.

The report from the British Business Bank, called UK Venture Capital Financial Returns 2021, also shows the UK has an increased proportion of top performing VC funds reporting very high returns; and that fund managers report positive views on the quality of investments available.

Those UK VC funds which made their first investment between 2008 and 2013 have seen an increase in their pooled Distributions to Paid In Capital (DPI) multiples of 0.26 points, from 0.79 in 2020 to 1.05 in 2021, the report says.

DPI measures the investment returned to the investor relative to invested capital.

This improvement was underscored by the bank’s fund manager survey showing fund managers have positive views on VC market conditions. 

Nearly all surveyed fund managers reported positive views on the quality of investments available (97 per cent) and current exit conditions (93 per cent).

But a high proportion of fund managers (59 per cent) reported high levels of competition for deals, which the bank says might suggest these high valuations might not be sustained until exit.

The data also shows a swing towards the performance of UK VC financial returns compared to the US.

Traditionally, US VC financial returns are considered by many in the VC industry to be substantially higher than the returns of UK and European funds.

But the data shows returns have been very similar since 2002.

Overall fund returns for UK VC funds with 2002-2016 vintage years-the year in which a fund makes its first investment- show a pooled DPI multiple of 1.01 and a pooled TVPI  (Total Value to Paid In Capital) 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.

Matt Adey, director of economics at the British Business Bank, said: “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.”

Judith Hartley, CEO, British Patient Capital said: “The performance of UK venture capital is a notable success story after what has been an otherwise challenging period for businesses across the world."

“The third annual UK Venture Capital Financial Returns report from our parent company, the British Business Bank, clearly illustrates the importance of venture capital as an asset class to investors, innovative companies, and the wider economy."

"The UK venture capital industry is in rude health, and British Patient Capital is committed to building on this success by supporting high growth, innovative companies led by ambitious entrepreneurs who want to build successful, world-class businesses.”