A report from the British Business Bank, entitled Analysis of UK VC Financial Returns, found that despite the perception US financial returns in the venture capital sector were consistently and substantially higher than in the UK, data showed this was not the case.
The British Business Bank is a state-owned economic development bank established by the UK government in 2014 with the aim to increase the supply of credit to small and medium size enterprises.
The bank’s report, published yesterday (October 24), found UK venture capital funds generated a higher distribution-to-paid-in-capital ratio (DPI) in the period of 2002 to 2006 than their US counterparts.
The DPI reflects the amount paid out to investors from the investment.
The UK's DPI was 1.95 for the period 2002-2006 compared with the US' 1.04.
From 2007-2011, the financial performance of UK venture capital funds was only "slightly lower" than in the US, according to the report.
The data showed the DPI was 0.86 for the UK compared with 1.12 for the US.
In the later years covered by the report (2012-2016) both the UK and the US' DPI dropped.
But the UK has outperformed the US in this time period, marking a 0.36 DPI compared with 0.22 for the US.
In the UK the most common form of venture capital investing is through venture capital trusts, which are like investment trusts but only invest in small, young and typically unlisted companies.
Although such companies are riskier and statistically more likely to go bust, investing in a VCT comes with a 30 per cent income tax relief from the government and any returns are tax free.
The trusts have performed well in recent years — the top 16 VCTs have all at least doubled investors’ money on a net asset value return basis over the last 10 years and 2018 had the second biggest VCT season on record based on inflows, according to data from the AIC.
According to the report, while early stage equity investment in the UK has historically suffered from periods of poor investment returns exacerbated by limited data on the performance of VC funds, the industry has transformed over the past decade as talent, networks, and exit routes strengthened and the historical perceptions of poor investment performance were increasingly out of date.
The AIC welcomed the bank’s report, saying investing in private companies at an early stage of their development could be rewarding both for investors and the wider economy.
Ian Sayers, chief executive of the AIC, said: “This report makes an important contribution towards assessing the financial returns of UK venture capital, and it underlines the attractions of this asset class as part of a balanced, long-term portfolio.
“However, when investing in unquoted companies, it is essential to use the right fund structure. Recent events have shown that exposure to unquoted companies within open-ended funds can lead to harmful consequences for investors.”
He thought the most suitable way to invest in venture capital was through listed investment companies, such as VCTs, or investment companies which invest through institutional funds.
Alice Hu Wagner, managing director for strategy, economics and business development at the British Business Bank, said: "We will continue to make available aggregate level data on both our own funds and on UK VC more generally to demonstrate that the UK VC market can be an attractive asset class."
imogen.tew@ft.com
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