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Venture Capital returns outstrip all other types of PE – has been assumed that the biggest PE deals outperform

by | Feb 26, 2024

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Returns on UK venture capital investment outstrip returns on all other types of private equity investment, with VC fund returns* since 2001, returning on average 2.13 times their investors’ initial investment compared to an average of 1.78x across all PE funds, says private equity firm Growthdeck.

The returns on venture capital funds since 2001 are higher on average than for private equity funds investing in large companies (1.82 times initial investment), mid-sized companies (1.67x) or smaller companies (1.8x).

Simon Emary, Director and Head of Portfolio at Growthdeck, says that the figures may surprise some who assume that the largest private equity investments deliver the highest returns.

 
 

Emary says that investments by VC funds into tech companies over the last 15 years that have been able to scale up far more rapidly than a traditional company have been a major contributor to their market-beating returns.

Says Simon Emary: “Venture capital has really proven its value to investors over the past two decades. Previously it had been about picking the right VC funds but this data shows that the category, on average has outperformed. Being able to access investment in the fastest-growing companies – like tech and fintech – has delivered very substantial returns.”

“Tech-focused VC funds have funded and benefitted from the most explosive growth phases of virtually every household-name tech business of the last 20 years. That’s just as true in the UK as in the US.”

 
 

UK venture capital funds have delivered better returns than any other type of UK private equity fund in every individual year since 2001.

The outperformance of venture capital funds is also evident using an IRR (Internal Rate of Return) metric. The average annual IRR return of VC funds between 2005 and 2018 was 22%, compared to 16.6% for all other PE funds. No other type of PE fund averaged more than 18% IRR over the period.

Adds Simon Emary: “The scaleup businesses backed by VC funds are more likely to be able to deliver the fast growth that many private equity investors are looking for. A key advantage of investment in venture capital compared to large private equity transactions is that it doesn’t require leverage to deliver elevated returns.”

 
 

Emary says that venture capital investments are available to individual investors, with the UK government’s flagship Enterprise Investment Scheme (EIS) acting as a vital route into equity investment in scaleup businesses for high-net-worth individuals.

Says Simon Emary: “There’s a perception that venture capital is something that only institutions can access, which isn’t the case. The Enterprise Investment Scheme has been giving high net worth individuals access to VC-type returns for almost 30 years.”

“Lots of those fast-growth tech scaleups lean heavily on EIS to get access to the equity investment they need. That creates a lot of opportunity for investors who can make the right selections.”

“The tax advantages of EIS mean that VC investment through the scheme can be even more worthwhile.”

* Measured in Total Value to Paid-In Capital (TVPI). Source: British Private Equity & Venture Capital Association (BVCA)

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