British Business Bank report highlights spike in UK VC fund performance

According to the research:

• UK VC funds continue to perform well, in comparison to their US counterparts;
• The UK has an increased proportion of top performing VC funds reporting very high returns;
• Fund managers report positive views on the quality of investments available (97%) and current exit conditions (93%), with the majority (59% and 72% respectively) reporting an improvement on these measures over the last year.

The British Business Bank report, ‘UK Venture Capital Financial Returns 2021’, concludes that higher company valuations - along with strong exit activity in 2020 and 2021 - has contributed to a material uplift in VC financial returns. However, a high proportion of fund managers (59%) also reported high levels of competition for deals, which may suggest these high valuations might not be sustained until exit.

Matt Adey, Director of Economics at the British Business Bank, commented: “This report provides as comprehensive a view as possible of the performance of the UK venture capital market. 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.”

Although the US still outperforms the UK for the top 3% of its funds, the UK has made a substantial improvement since 2019, when the top 8% of US funds had higher total value to paid-in (TVPI)s than UK funds. The UK’s distribution of TVPI multiples follows an almost identical shape to that of the US - up to the third percentile. The improved performance of these top UK funds suggests that UK VC could be an attractive asset class for those LPs currently investing or considering investing in US VC.

‘UK Venture Capital Financial Returns 2021’ is the British Business Bank’s third annual report examining the financial performance of UK VC funds. The report covers 154 UK VC funds with a 2002-19 vintage and draws on data from the British Business Bank, commercial data providers, as well as a survey of UK VC fund managers. It provides a thorough view of the asset class and its performance - covering 38% of the UK VC market.