UK Life Sciences Venture Capital Outperforms General Market: British Business Bank Report

While the Total Value to Paid-In capital (TVPI) multiple for life sciences funds was 1.76, slightly below the wider market multiple of 1.99, this is attributed to the sector's nature. TVPI assesses both realized returns and the current value of unrealized investments relative to the capital invested. In the life sciences sector, companies often need to achieve significant milestones—such as successful clinical trials—before their valuations see substantial increases.

Green Tech Investments Show Increased Commercial Viability

The green technology sector has rebounded since its downturn in 2010. For funds with vintages from 2014 to 2022, green tech funds produced a pooled TVPI multiple of 1.55, aligning more closely with the wider market multiple of 1.64. This improvement suggests that the second wave of green tech innovation is producing more commercially viable propositions, leading to increased valuations and investor confidence.

UK VC Returns Competitive with US and Europe

Historically perceived as lower, UK VC returns have matched or exceeded those in the US and Europe for older vintages. For funds established between 2002 and 2019, UK VC funds generated a pooled TVPI multiple of 1.87, compared to 2.01 for US funds and 1.96 for European funds. Specifically, UK funds from the 2002-2007 vintages outperformed both regions on DPI and TVPI measures.

For more recent vintages (2014-2022), UK funds have a pooled return of 1.64, which is in line with the US (1.63) but slightly below Europe (1.76), reflecting current market challenges and portfolio valuations being marked down.

See also: Breaking Through the Investment Gap: Mark Andrews Discusses British Patient Capital's Life Sciences Fund

Valuations Decline Slightly in 2023/24, Mirroring Global Trends

In an analysis of 139 UK funds reporting data in both 2023 and 2024, the UK's pooled DPI remained steady at 0.37, similar to last year's figure of 0.36. This suggests that a lack of exit opportunities remains a key challenge for fund managers. The pooled TVPI multiple decreased from 1.73 to 1.61, indicating that fund managers continue to adjust portfolio valuations downward. This trend is consistent with declines in Europe (from 1.87 to 1.75) and the US (from 1.82 to 1.66), although UK funds were slightly more resilient than those in the US.

Matt Adey, Senior Director of Economics at the British Business Bank, said: “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.”

Fundraising Challenges Persist, Yet Optimism for Exits Grows

A survey of 42 UK VC fund managers found that 69% reported the current state of the market for raising funds as poor or very poor, up from 64% last year. These challenging conditions have led 25% of general partners (GPs) to postpone plans for raising new funds.

Despite these hurdles, fund managers are increasingly optimistic about exit opportunities—the ability to sell investments at a profit. While 62% of fund managers still believe the availability of exit opportunities is poor or very poor—a 10% decrease from 2023—nearly 75% expect exit conditions to improve over the next year, with none expecting them to worsen.

British Patient Capital-Backed Funds Show Improved Performance

Funds backed by the British Business Bank's Enterprise Capital Funds (ECF) program have generally outperformed the wider UK market. ECF funds with vintages from 2006 to 2022 reported a pooled DPI of 0.60. Due to the program's structure, where the Bank receives a lower share of potential profits, the DPI for other limited partners (LPs) in these funds was higher at 0.70. Both figures exceed the wider market's pooled DPI of 0.43.

British Patient Capital (BPC)-backed funds with vintages from 2013 to 2022 reported a pooled DPI multiple of 0.20, aligning with the wider market (0.19). When including unrealized investments, BPC funds' pooled TVPI of 1.40 is lower than the overall UK VC market's 1.65, though the gap has narrowed from 0.29 in last year's report. The median TVPI multiple is now higher for BPC-supported funds (1.33) compared to the overall market (1.28), indicating an improvement in BPC's relative performance over the past year.

Industry Leaders Highlight the Importance of VC Investment

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 emphasizes 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.”

According to the report there's strong performance of UK life sciences and green tech VC funds in delivering returns to investors. Despite current fundraising challenges, the UK venture capital industry remains competitive with the US and Europe. Fund managers are cautiously optimistic about improved exit opportunities in the coming year, signaling potential growth and stability in the sector.

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