Industry view – British Patient Capital


Ian Connatty is managing director of British Patient Capital


THE NEW REALITY OF UK AND EUROPEAN VENTURE CAPITAL


With a strong track record of producing world beating tech companies, Silicon Valley has long been the ultimate destina- tion for venture capital investment. But in the UK and Europe, a quieter revolution has been taking place, and one to which institutional investors should be paying attention.


The past decade has seen the UK and Europe’s tech sector grow from a cottage industry to one regularly producing global leaders. An increasing number of these start-ups, including innovative UK fin- techs TransferWise and Revolut, are val- ued at more than $1bn (£759m). The UK in particular has a strong record of developing science-based businesses from its world-leading universities, but what is increasingly setting the UK and Europe apart from the US is the increasingly “pur- pose driven” nature of company founders. For example, UK digital mortgage company Habito has become B Corp certi- fied, making it legally obliged to put people and the planet on the same level as profit. Not all these companies will list on the public markets, with the majority being


acquired by multi-nationals. Those that do go public are remaining private for longer to achieve scale before making their stock market debut. It is, of course, easy to claim these may be isolated cases, but the strength of the European tech sector is coming through in hard data. Indeed, a recent report by our parent company, the British Business Bank, showed that UK venture capital performance is now on par with, and in some cases even outperforming, US ven- ture capital.


It takes time (and skill) to build innova- tive companies to scale, that is why a ven- ture capital fund is typically structured as a close-end, 10-year life fund, whereby capital is locked up for the life of the fund. That is why UK and European venture capital should also be seen in the context of increased allocations to the private markets. Typically, this has included real assets, such as property or infrastructure, and investments in private companies through private equity and private credit funds. What also sets venture capital apart, is its modest correlation to these other illiquid alternatives and the public markets.


Each venture capital fund manager will have a different strategy, some focus on the youngest companies, others on mature “scale-ups”. Some are generalists investing across a range of technologies, while others specialise in themes. That is why just as a venture capital fund will invest in many companies, it’s important for institutional investors to consider investments across a group of funds. Diversification by sector, stage and vin- tage, as well as selecting best-in-class


managers, is key to managing risk and delivering returns. British Patient Capital is invested in more than 40 funds for this reason.


Ultimately, a venture capital allocation strategy is one based on innovation and it is from innovation that new global leaders are born. Unlike many other areas of the economy, their growth could well be accelerated by the Covid-19 crisis. Many of the global tech success stories of the past 10 years, such as Instagram, Uber and WhatsApp, were founded in the wake of the financial crisis. Given the strong fun- damentals in the UK and Europe, there is no reason why the next “hyper-scalers” will not just as easily emerge from Lon- don, Cambridge or Edinburgh. If institutional investors are going to cap- ture the value created by not just new companies but new sectors too, and per- haps even accelerated by Covid-19, they should be considering an allocation to UK and European venture capital.


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14 | portfolio institutional September 2020 | issue 96


Publisher John Waterson


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