The value of companies held by the venture capital arm of the UK government has started to fall, reflecting the broader slowdown in the tech sector which is raising concerns about the future funding of UK start-ups.
The head of state-owned British Patient Capital, part of the British Business Bank, has pledged to use its funds to help support fast-growing businesses in the UK during the recession.
Some start-ups are now finding it more difficult to raise new money given the reluctance of venture capitalists to invest in companies whose valuations appear to be falling rapidly.
Catherine Lewis La Torre, who leads the venture capital program after serving as interim chief executive of its parent group BBB, said she saw valuations falling.
She said British Patient Capital investments had benefited from “a small number of outperforming companies” when the market was strong, but the reverse was now true, “where [these] businesses suffer a ‘downturn’ and are worth less as a result”.
“We absolutely see that,” she said, but added that she was focusing on longer-term returns.
“It’s not really the short-term valuations that we’re most concerned about. We haven’t been too excited about the fantastic performances we’ve had over the past two years. And we’re not going to worry too much about falling valuations this year and next year. »
British Patient Capital’s portfolio total internal rate of return since inception was 32.9% at the end of March 2022, compared to 25.3% in March 2021.
British Patient Capital, which has a budget of over £3bn but invests mainly in other venture capital funds, will say in its latest financial results on Monday that its total commitments and co-investments reached 1, £6 billion.
It is the largest domestic investor in the UK venture capital market, holding stakes in approximately 1,008 companies through its venture capital fund holdings.
In the year to March it invested £341m, in part thanks to the launch of new programs such as Future Fund: Breakthrough, a £375m scheme which invests directly in companies at high R&D intensity.
Lewis La Torre said there were still significant amounts of money available to support scaling ventures over the next few years, which she said would help given that there were “more caution in the market” from other investors.
She added: “There is evidence that there is this pullback, but there is still a lot of dry powder out there. Hopefully there will be more activity in the market, but investors are going to be much more selective about what they invest in. We are going to have some very difficult times ahead.
She said BPC could support companies by taking direct stakes or adding additional funds in venture capital vehicles focused on fast-growing UK businesses.
However, she was unsure whether a new £500m fund promised by Kwasi Kwarteng in his ‘mini’ budget in September would go ahead. This would make it possible to co-invest alongside institutional investors. Many of the ‘mini’ budget proposals have since been scrapped or canceled by new Chancellor Jeremy Hunt.