Early stage venture capital funds have the potential to generate higher returns, finds latest research by the British Business Bank
Latest market analysis from the British Business Bank published today finds early stage venture capital funds have the potential to generate higher returns than later stage VC funds. Early stage VC funds generated a pooled Distributions to Paid In (DPI) multiple of 1.43 and pooled Total Value to Paid In (TVPI) multiple 1.99, which is 0.73 and 0.71 pp higher than later stage VC funds.
The new report, UK Venture Capital Financial Returns 2020, draws together data from existing data sources including PitchBook and Preqin, and from the Bank’s own programmes, as well as a new survey of fund managers, to provide as comprehensive a picture as possible of the asset class and its performance.
A survey of fund managers carried out specifically for the UK Venture Capital Financial Returns 2020 report found that fund managers are optimistic on deal flow, with all survey recipients rating deal flow as ‘good’ or ‘very good’. There are mixed views, however, on exit conditions (60% positive, 36% negative) and fundraising conditions (41% positive, 41% negative). The majority (86%) of fund managers have changed their investment process to adapt to Covid-19.
Other findings include:
- Funds located outside of the ‘Golden Triangle’ of London, Cambridge and Oxford show DPI of 1.65, 80pp higher than those based within (0.85). This is due to strong performance of a small number of high performing funds that have invested across the UK and in several unicorn businesses.
- UK VC funds with 2002-2007 vintage delivered good financial performance, with a positive DPI multiple of 1.61. These funds generated a pooled TVPI multiple of 1.99, showing the potential for further upside.
- More recent VC funds with a 2008-13 vintage generated a pooled TVPI multiple of 1.81, which suggests the future outlook for fund performance is good.
- British Business Bank-supported funds are largely performing in line with the wider VC market:
- British Patient Capital pooled DPI returns of 0.18 are slightly higher than the wider VC market for funds of the same vintage.
- While Enterprise Capital Fund DPI performance lags the market, the TVPI returns for other LP investors of 1.65 is slightly ahead of VC funds of the same vintage.
Alice Hu Wagner, MD for Strategy, Economics and Business Development at the British Business Bank, said: “This report provides the most thorough and robust view possible of the venture capital finance market for UK small businesses, drawing upon more sources than ever before.”
“It’s important for investors to know that early stage venture capital funds have the potential to generate high returns, as the early stages of the market are important for the health of the overall equity ecosystem, including later stages. It’s also encouraging that fund managers remain optimistic about market conditions”
About the British Business Bank
The British Business Bank is the UK government’s economic development bank. Established in November 2014, its mission is to make finance markets for smaller businesses work more effectively, enabling those businesses to prosper, grow and build UK economic activity. Its remit is to design, deliver and efficiently manage UK-wide smaller business access to finance programmes for the UK government.
The British Business Bank programmes were supporting more than £8bn of finance to over 98,000 smaller businesses at end of March 2020. Since March 2020, the British Business Bank has launched four new Coronavirus business loan schemes, delivering tens of billions of pounds of finance to over a million businesses.
As well as increasing both supply and diversity of finance for UK smaller businesses through its programmes, the Bank works to raise awareness of the finance options available to smaller businesses:
- The British Business Bank Finance Hub provides independent and impartial information to high-growth businesses about their finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success. The site also features case studies and lessons from real businesses to guide businesses through the process of applying for growth finance.
- The Business Finance Guide (published in partnership with the ICAEW and a further 21 business and finance organisations) impartially sets out the range of finance options available to businesses at all stages – from start-ups to SMEs and growing mid-sized companies. Businesses can take the interactive journey at https://thebusinessfinanceguide.co.uk/
As the holding company of the group operating under the trading name of British Business Bank, British Business Bank plc is wholly owned by HM Government and is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). The British Business Bank operates through a number of subsidiaries, none of which are authorised or regulated by the FCA or the PRA.
British Business Bank plc and its principal operating subsidiaries are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found on the British Business Bank plc website.