Patient Capital: UK Institutional Investors are Missing Out on Value Created by UK High-Growth Companies

Judith Hartley, CEO of British Patient Capital, has distributed feedback on the just-published British Business Bank Small Business Finance Markets Report. Hartley believes that while unicorns are an indicator of success that many firms never achieve unicorn status yet still deliver strong returns. Hartley says the Bank’s report does not address “the absence of UK investors writing big checks behind later-stage funding rounds.” British Patient Capital Limited is a wholly-owned commercial subsidiary of British Business Bank plc.

Hartley believes that UK institutional investors are missing out on the value created by UK high-growth companies, and backing venture growth funds is a significant opportunity.

Hartley notes that the Bank’s report shows that equity investment into private smaller companies reached new heights in 2020, rising by 9% on 2019 levels to £8.8 billion. The average deal size continues to increase, driven by a small number of very large deals. Equity deal sizes increased by 3% in 2020 and the number of deals greater than £10 million increased from 173 in 2019 to 176 in 2020. Of the six UK companies to achieve unicorn status in 2019, five were backed by venture capital. Despite the global pandemic, equity investors continue to find smaller private UK companies highly attractive.

The UK currently reports 22 unicorns and two of the new entrants to this list are in British Patient Capital’s underlying portfolio of companies: Hopin and Cazoo. These two companies experienced dramatic growth as Hopin became a unicorn after only one year and Cazoo after just two. Hartley adds that in venture capital returns don’t come from the average deal but from a few exceptions.

“Notwithstanding this, it would be wrong to think that venture capital is all about unicorn creation. While unicorns are an important indicator of success, they are not the sole objective of a fund. Many exceptionally high-impact and successful companies never achieve unicorn status but are nonetheless of high value within a venture capital investor’s overall portfolio,” said Hartley. “Dragons’ can be just as important as unicorns and that’s why “Dragon chasing’ remains a priority for many venture capitalists. A dragon is a single company in a venture capital fund portfolio that will, on exit, deliver a return at least equal to the value of the fund. These companies are equally as rare and as valuable as unicorns.”

Hartley believes there is a “paucity of UK investors writing big checks for later-stage funding rounds in the UK.” This is in spite of the fact there are deep pools of institutional capital.

“This creates a significant opportunity for British Patient Capital and for other institutional investors. It’s one of the reasons why British Patient Capital focuses upon committing capital to UK focused ‘venture growth’ funds, which we define as those investing at Series B onwards,” Hartley added. “There is an increasing pool of experienced venture and venture growth managers, who are backing some of the most exciting high-growth companies in the UK. It is through these managers that UK institutional investors can both drive and capture the value that exceptional companies such as Cazoo and Hopin can create.”

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