Why some UK VCs see their future in the public markets

A handful of UK-based venture capital firms are freeing themselves from the constraints of the traditional closed-end fund structure by listing themselves on the public markets.

When early-stage investor Forward Partners made its debut on the London Stock Exchange last month, it joined a small cohort of firms that are turning to public markets as a source of capital. 

The UK is now home to public VCs including Augmentum Fintech and Mercia Asset Management, along with Forward and Draper Esprit, which in July moved from the junior markets in both the UK and Ireland to their respective main segments.

While a small number, it represents a significant shift away from a long-established strategy. These investors raise capital through share sales, instead of from limited partners, and use the proceeds to invest in startups off their balance sheets. The firms closely resemble venture capital trusts—listed vehicles that invest in small, unquoted companies—but without a management fee, allowing them to prioritize the needs of their portfolio companies. 

“You can assess venture capitalists by their financial returns, but the true essence of venture is the journey,” said Stuart Chapman, director and co-founder of Draper Esprit. “We wanted to match entrepreneurs’ needs and wishes, and why should their decisions revolve around what is best for the investor’s fund? So we set out to build a business that could journey with the entrepreneur from seed all the way through to public offerings and beyond.”

Because firms have long been able to fundraise successfully, the traditional venture model has not seen much disruption, according to Chapman, but limitations to that approach have begun to draw a handful of VCs to the public markets. 

In escaping a limited partnership model, there is a freedom from the constraints of a traditional fund’s lifespan. Instead of having to deploy capital and exit investments in five to seven years, publicly listed firms can adopt the patient capital approach with more ease and allow startups more time to mature. Rather than redistribute returns back to LPs, the capital can be recycled into new investments—further removing the need for future fundraising. 

“In the GP/LP world, there’s incentive to deliver amazing numbers very quickly,” said Matt Bradley, partner and CFO of Forward Partners. “But sometimes that means you build less of a strong company over the long term. We are much closer to being masters of our own business model, which gives us the flexibility to be innovative. There’s much more public money [than there used to be] interested in getting access to early-stage VC, and firms like ourselves are meeting that demand.”

With the growth of private capital over the past few decades, there’s now much more knowledge and understanding of venture capital and of how returns are realized from non-LP-focused institutions, according to Bradley, making it a more attractive asset class for them. According to a report from Morgan Stanley, the private capital industry has surpassed $7 trillion and is expected to reach $13 trillion by 2025. 

Further expanding the pool of capital available to publicly listed VC firms is the ability to raise from retail investors. Venture capital has been historically hard for them to access, due to high minimum investment thresholds attainable only by institutions and high-net-worth individuals. Both Forward Partners and Draper Esprit made use of PrimaryBid, which gives individuals access to investment opportunities such as IPOs and company fundraises, for their offerings—which were both oversubscribed. 

The success of the—albeit small—group of publicly listed VC firms has the potential to increase confidence in the validity of the model for both public investors and VC firms. These firms face the challenge of proving their ability to scale while being subject to market fluctuations, but results have so far been positive. Since going public in 2016, Draper Esprit has gone from a market cap of just over £120 million to £1.6 billion. In the case of Augmentum Fintech, for example, its share price has grown around 60% since its debut in 2018. 

So will there be more listed VC firms? Yes, Chapman said, but he believes that it will remain a path for a select few looking to make longer-term bets and prioritize sustainability over quick returns. 

“If the reason you get out of bed in the morning is to create a profitable fund, then the limited partnership model is a good and lucrative one,” Chapman said. “The public model isn’t for everyone, and you have to have the motivation and the state of mind of an entrepreneur. If you’re calling yourself a general partner, then it’s not for you.”