New research from the British Business Bank has found that the returns of venture capital funds in the life sciences industry outperform other sectors, but that the overall performance of UK VC funds declined slightly in 2023/24, in line with the US and the rest of Europe.

The Bank’s findings, published as part of its UK Venture Capital Financial Returns 2024 report, showed that for 2002-2019 vintages, life sciences funds across the UK, US and Europe reported a pooled Distributions to Paid In capital (DPI) multiple of 1.14 – higher than the overall market figure of 1.02. 

Meanwhile, the pooled Total Value to Paid-In capital (TVPI) for life sciences funds (1.76) was below the wider market multiple of 1.99, though the Bank noted that companies in this sector often need to complete significant milestones, such as clinical trials, before receiving mark ups in their valuation.

The report also shows that green tech investments are becoming more commercially viable, with the sector recovering from its downturn in 2010 and returns of recent vintages sitting closer to the wider market.

For 2014-2022 vintages, green tech funds produced a pooled TVPI multiple of 1.55, significantly higher than for vintages since 2002 and more in line with the wider market (1.64). 

The Bank said that while this second wave of green tech innovation is still relatively immature in comparison to other successful VC-backed sectors, this performance data suggests the industry is producing more commercially viable opportunities that are now seeing increases in valuation.

Looking to the wider market, the report found that UK VC returns were above the US and the rest of Europe for older vintages, and are in line with or slightly below for more recent vintages. For 2002-2019 vintages, UK VC funds generated a pooled TVPI multiple of 1.87, compared to 2.01 for US funds and 1.96 for funds in the rest of Europe.

To assess changes in fund performance, the Bank also surveyed 42 UK VC fund managers and found that the majority continue to experience challenging fundraising and exit environments. 

In all, 69% of general partners (GPs) said that the current state of the market for raising funds was poor or very poor (up from 64% last year), with these difficult conditions leading to a quarter of GPs pushing back plans for raising a new fund. 

While 62% of fund managers said the availability of exit opportunities was poor or very poor, a 10% decrease from last year, GPs were more optimistic about future recovery in this area, with nearly three-quarters of fund managers expecting exit conditions to improve over the next year, and none expecting them to become worse.

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“This year’s report finds that the UK market continues to generate similar returns to the US and rest of Europe on some measures, while also slightly underperforming on others,” said Matt Adey, senior director of economics at the British Business Bank.

“While our survey results show that the majority of fund managers believe that fundraising conditions are challenging, it is encouraging that they are also expecting exit opportunities to improve over the next year.”