UK VCs face dwindling exit opportunities, report finds

VCs exits UK

VCs and startups are grappling with tough conditions to raise capital and find exit opportunities, a report has found.

Nearly three-quarters of fund managers surveyed by the British Business Bank said exit conditions have deteriorated over the last year amid rising interest rates, soaring inflation and a looming recession.

While 64% of UK fund managers said there are still good deals to be found in the market, converting existing ventures into returns via a public listing or M&A has become more difficult over the last year.

This year the UK’s IPO market has fallen off a cliff following a record 2021. Last year there were 126 listings on the London Stock Exchange. Nearly a third – 29% – of those were tech companies, which collectively raised £6.6bn.

By contrast, KPMG data shows just 11 companies listed in London in the first half of 2022, raising £500m – a 95% decrease compared to the 40 listings that raised £9.9bn in the year prior period.

That trend has continued throughout Q3, with EY noting a 76% decrease in IPO deal numbers compared to the same period in 2021.

State-owned British Business Bank found in its annual report that just 7% of fund managers thought raising conditions were good or very good, compared to 79% last year.

This shift reflects how the era of cheap money, which has fuelled tech growth and driven up startup valuations, is over.

“There will doubtless be tough times ahead. Fundraising is slowing. Exits are becoming harder to secure. Valuations are falling. Next year’s data may well paint a different picture,” said Catherine Lewis La Torre, CEO of British Patient Capital, the commercial subsidiary of British Business Bank.

“But ultimately, as the largest domestic investor into UK venture and venture growth capital funds, British Patient Capital remains convinced of the fundamental strength of the UK innovation economy and the importance of venture capital in driving sustainable growth.”

The report, ‘UK Venture Capital Financial Returns 2022’, also found that historical returns for the UK’s VC funds are similar to those in the US, despite commonly held perceptions to the contrary.

However, top US VC funds have “substantially” higher total value to paid in (TVPI) multiples compared to the top UK funds.

“The continued financial returns of UK VC relative to counterparts in the US are promising as UK VC continues to show good performance,” said Matt Adey, director of Economics at the British Business Bank. “While it is encouraging that returns have remained resilient, the economic headwinds facing global markets are reflected in our fund manager engagement results, the impact of which will be seen in future data.”