Venture Capital Trusts  

Cost barriers are preventing VC launches

Cost barriers are preventing VC launches

Increasing costs are proving a barrier to new managers launching funds in the UK venture capital sector, a report has found.

Looking at activity throughout 2018 in its Small Business Equity Tracker report, the British Business Bank said the "high and increasing cost of personal commitment for new general partners may be preventing talented fund managers from launching new funds".

A survey included within the report stated that 60 per cent of established managers had invested more than £100,000 into their first fund from their own money. The average commitment was even higher for those who started their first fund in the past decade.

"It is clearly a challenge," said Patrick Connolly, a chartered financial planner at Chase de Vere.

"You need the finance behind you and the expertise as well. There are a very limited number of people that have access to that.

"Perhaps, there is a reluctance with the uncertainty in the UK economy as well. If investors are looking to put money with these companies, they will be seeking experienced investors, and companies that they know and trust."

Data from the Association of Investment Companies showed investors ploughed £731m into Venture Capital Trusts in the 2018/19 tax year, the highest level since 2006.

But about a third of the total cash raised came from just one VCT, Octopus Titan, which raised £228m of the total, having twice increased the amount of capital it was seeking from investors.

Meanwhile, a record number of small and medium sized UK businesses offered up shares in their business for cash during 2018, amid sustained interest from investors, according to the British Business Bank.

The report found that £6.7bn of equity finance was invested in UK SMEs last year, as the allure of SME companies continued to attract UK investors for a fifth successive year.

Technology firms were the most popular with equity investors, according to the report, with 44 per cent of the total amount being invested in such assets. In fact, the technology sector saw investment totals increase by more than a quarter on the previous year, with the total amount invested topping £3bn.

But while the value invested has grown, the number of deals actually declined in 2018, falling 6 per cent. The decline in deals was reflected by all investor groups, with the number of deals by private equity and venture capital funds falling 9 per cent in 2018, compared with 2017 and the number of deals involving so-called business angels down 19 per cent.

Despite the number of deals being down across the UK as a whole, there were some regions where there were increases in deal numbers.

The north east saw a large increase in the number of deals, up 65 per cent, while the Yorkshire and Humber region saw a rise of 15 per cent. Wales saw growth of 11 per cent.

Mr Connolly added there had been "continued interest" in the domestic economy by some investors.