UK state-owned venture fund valuations start to fall

Values of companies held by the UK government’s venture capital arm have started to fall, reflecting the wider slowdown in the tech sector that is causing concerns about future funding for British start-ups.

The head of state-owned British Patient Capital, which is part of the British Business Bank, promised to use its funds to help support fast-growing companies in the UK through the downturn.

Some business founders are now finding it harder to raise new funds given the reluctance of venture capital investors to put money into companies whose valuations appear to be falling fast.

Catherine Lewis La Torre, who runs the venture programme after serving formerly as interim chief executive of its BBB parent group, said she was seeing valuations fall.

She said British Patient Capital’s investments had benefited from “a small number of outperforming companies” when the market was strong, but the reverse was now true, “where [these] companies take a ‘down round’ and are worth less as a consequence”.

“We absolutely are seeing that,” she said, but added that she was focused on longer-term returns.

“It’s not really short-term valuations that we’re most concerned about. We didn’t get overly hyped up around the fantastic performance that we had in the last couple of years. And we’re not going to get overly concerned about lower valuations in this and next year.”

The total portfolio internal rate of return for British Patient Capital since it started was 32.9 per cent at the end of March 2022, compared with 25.3 per cent in March 2021.

British Patient Capital, which has a budget of more than £3bn but mainly invests in other venture capital funds, will say in its latest financial results on Monday that its total commitments and co-investments have reached £1.6bn.

It is the largest domestic investor in the UK venture capital market, owning stakes in about 1,008 companies through its stakes in venture funds.

During the year to March, it invested £341mn, in part through the launch of new programmes such as Future Fund: Breakthrough, a £375mn scheme that invests directly in R&D-intensive companies.

Lewis La Torre said there was substantial amounts of money still available to support scale-up companies over the coming years, which she said would help given there was “more caution in the market” from other investors.

She added: “There is evidence that there is that pullback, but there is a lot of dry powder still out there. I’m hopeful that there will be more activity coming back into the market, but investors are going to be much more selective in terms of what they invest in. We’re going to be in for very challenging times ahead.”

She said BPC could support companies through taking direct stakes or through adding further funds into venture capital vehicles focused on fast-growing British companies.

However, she did not know if a new £500mn fund promised by Kwasi Kwarteng in his “mini” Budget in September would go ahead. This would co-invest alongside institutional investors. Many of the proposals in the “mini” Budget have since been dropped or reversed by the new chancellor Jeremy Hunt.