- Early stage VC funds generated higher pooled DPI and TVPI multiples than later stage VC funds
- Funds located outside ‘Golden Triangle’ of London, Cambridge and Oxford deliver higher returns than those within.
- 36% of fund managers rate deal flow quality in the current venture capital market as ‘very good’
Latest market analysis from the British Business Bank 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, 35% 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:
o British Patient Capital pooled DPI returns of 0.18 are slightly higher than the wider VC market for funds of the same vintage.
o While Enterprise Capital Fund DPI performance lags the market, the TVPI returns for other LP investors of 1.65 is equal for 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”