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Life sciences venture capital funds outperform overall market in realising returns for investors, finds British Business Bank report

Press release 06 November 2024

  • UK VC returns were above the US and the rest of Europe for older vintages, and are in line with or slightly below for more recent vintages
  • Performance of UK VC funds declined slightly in 2023/24, in line with the US and rest of Europe
  • While fundraising conditions remain challenging, the majority of fund managers are expecting exit opportunities to improve over the next year

Life sciences venture capital funds outperform the market for realised returns, while green tech investments are becoming more commercially viable

New in-depth research from the British Business Bank, UK Venture Capital Financial Returns 2024, finds that the realised returns of venture capital funds in the life sciences industry outperform other sectors. For 2002-2019 vintages, life sciences funds across the UK, US and Europe reported a pooled Distributions to Paid In capital (DPI) 1 multiple of 1.14 – higher than the overall market figure of 1.02. The pooled Total Value to Paid-In capital (TVPI) 2 for life sciences funds (1.76) was below the wider market multiple of 1.99, though companies in this sector often need to complete significant milestones, such as clinical trials, before receiving mark ups in their valuation.

Green tech sector recovered from downturn

As the green tech sector has recovered from its downturn in 2010, the returns of more recent vintages have been closer to the wider market. For 2014-2022 vintages, green tech funds produced a pooled TVPI multiple of 1.55 – significantly higher than for vintages since 2002 and more in line with the wider market (1.64). While this second wave of green tech innovation is still relatively immature in comparison to other successful VC-backed sectors, this recent performance data suggests that the industry is now producing more commercially viable propositions which are seeing increases in valuations.

UK VC returns were above the US and the rest of Europe for older vintages, and are in line with or slightly below for more recent vintages

Historically, US VC financial returns were perceived by many commentators to be substantially higher than UK funds. However, for 2002-2019 vintages, UK VC funds generated a pooled TVPI multiple of 1.87, compared to 2.01 for US funds and 1.96 for funds in the rest of Europe.

Looking at specific vintage year cohorts, UK funds outperformed other markets during the vintage period after the dot-com bubble. UK funds established across the 2002-2007 vintage period outperformed both the US and the rest of Europe on both DPI and TVPI measures. For more recent 2014-2022 vintages, while portfolio valuations are continuing to be marked down amid more challenging market conditions, the UK’s pooled return (1.64) is in line with the US (1.63) but below the rest of Europe (1.76).

Over the short term, company valuations continued to decline during 2023/24, leading to lower TVPI return multiples

To assess changes in fund performance over the past year, the report also analysed a sample of 139 UK funds that reported the latest returns data in both 2023 and 2024. The UK’s pooled DPI for this sample of 0.37 remained in line with last year’s figure (0.36), suggesting that a lack of exit opportunities remain a key challenge for fund managers.

The UK’s pooled TVPI multiple fell from 1.73 to 1.61 in 2024, which represented a similar annual decline to last year’s report and shows that fund managers are continuing to mark down the value of their portfolios. This change in TVPI is in line with the equivalent decrease for rest of Europe funds (from 1.87 to 1.75), while UK funds were slightly more resilient than those in the US – for which the pooled TVPI multiple fell from 1.82 to 1.66.

  • 1

    Distributions to Paid-In capital (DPI) is the ratio of distributions to investors divided by the amount of capital paid into the fund to date.

  • 2

    Total Value to Paid In (TVPI) is the ratio of the current value of remaining portfolio investments within a fund, plus the total value of all distributions from exits to date, relative to the total amount of capital paid into the fund to date.

This year’s report finds that the UK market continues to generate similar returns to the US and rest of Europe on some measures, while also slightly underperforming on others. While our survey results show that the majority of fund managers believe that fundraising conditions are challenging, it is encouraging that they are also expecting exit opportunities to improve over the next year. - Matt Adey Senior Director of Economics at the British Business Bank

Fundraising remains a key challenge for GPs, though there are some initial signs of improved exit conditions and expectations for higher valuations

The Bank’s survey of 42 UK VC fund managers found that a significant majority of fund managers continue to experience challenging fundraising and exit environments. In total 69% of general partners (GPs) reported that the current state of the market for raising funds was poor or very poor (up from 64% last year). These difficult conditions have led to a quarter of GPs pushing back plans for raising a new fund.

While 62% of fund managers believed the availability of exit opportunities was poor or very poor – a 10% decrease from 2023 - GPs are more optimistic about a future recovery in this area of the market. Looking forward, nearly three-quarters of fund managers are expecting exit conditions to improve over the next year, with none expecting them to become worse.

The relative performance of British Patient Capital-backed funds has improved over the past year

The report also includes performance data for the VC funds that have been backed by the Bank’s Enterprise Capital Funds (ECF) programme and its commercial subsidiary, British Patient Capital (BPC).

Funds in the ECF portfolio have generally outperformed the wider UK market. ECF funds with a 2006-2022 vintage reported an overall pooled DPI of 0.60. As the Bank receives a lower share of potential profits as part of the programme, the DPI for other LPs in these funds was higher at 0.70. For comparison, both of these figures exceed the wider market’s pooled DPI of 0.43.

BPC-backed funds with a 2013-2022 vintage reported a pooled DPI multiple of 0.20, in line with those across the wider market (0.19). When including unrealised value, BPC funds’ pooled TVPI of 1.40 is lower than for funds across the wider UK VC market (1.65) – though this gap has narrowed from 0.29 in last year’s report. The median TVPI multiple is also now higher for BPC-supported funds (1.33) than for funds across the overall market (1.28), further showing an overall improvement in BPC’s relative performance compared to last year.

Responding to the report, Michael Moore, chief executive of the British Private Equity and Venture Capital Association (BVCA), said:

The British Business Bank's report demonstrates the vital role that venture capital plays in the UK economy.

This report shows how challenging it can be for venture capital firms to raise funds - Currently, just 3% of worldwide pensions investment into UK led growth.equity and venture capital is from UK pension funds. This emphasises the importance of initiatives linked to the pensions investment review which aim to catalyse institutional investment into UK venture capital and growth funds, and the businesses they invest in.

ENDS

Further Information

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Notes to editors

About UK Venture Capital Financial Returns

UK Venture Capital Financial Returns 2024 is the sixth year the British Business Bank has published a report looking at financial performance of UK VC funds. This report includes the fund performance data of 241 UK VC funds with 2002-2022 vintages, and draws on data from both the British Business Bank and commercial data providers, including PitchBook and Preqin, as well as a survey of UK VC fund managers, making it the largest source of information available on the performance of UK VC funds.

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 drive sustainable growth and prosperity across the UK and to enable the transition to a net zero economy, by improving access to finance for smaller businesses. 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’s core programmes support over £17.4bn 3 of finance to almost 64,000 4 smaller businesses.

As well as increasing the supply and diversity of finance for UK smaller businesses through its programmes, the Bank works to raise awareness of finance options available to smaller businesses. The British Business Bank Finance Hub provides independent and impartial information to businesses about finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success.

The British Business Bank is also responsible for administering the government’s three Coronavirus loan schemes and its Future Fund, together responsible for delivering £80.4bn in finance to 1.67m businesses. These schemes are now closed to new applications.

British Business Bank plc is a public limited company registered in England and Wales, registration number 08616013, registered office at Steel City House, West Street, Sheffield, S1 2GQ. Wholly owned by HM government, the Bank and its subsidiaries are not banking institutions and do not operate as such. They are not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). A complete legal structure chart for the group can be found at british-business-bank.co.uk.

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