UK taxpayers pour £1bn into private capital investments via BPC

British Patient Capital, a government-backed investment vehicle, has ploughed more than £1bn into the UK tech sector, primarily by stumping up funds for private venture capital firms to invest on its behalf. The company’s annual results for the 12 months to 31 March 2020 show that it has a just over £1bn invested across 42 different funds, making it the largest domestic investor in UK venture capital.

In the period covered, BPC deployed an additional £405m across 11 commitments to new venture capital partners, and the number of underlying start-ups in its portfolio grew from 322 to 503. Start-ups focused on the future of work and education account for the largest slice of BPC’s portfolio, at 19%, while 13% of its investments are in fintech firms.

BPC’s goal is to expand the amount of funding available to venture capital funds that invest in the UK, thus enabling them to write bigger cheques when investing in later stage tech start-ups.

Russ Cummings, BPC’s chair, said the vision is to create “more homegrown and fully funded, high-growth companies to fulfil their potential to be players on the global stage”.
“By increasing the availability of patient capital to our high-growth businesses, we fuel innovation, heighten ambition and power economic growth,” he added.

BPC is also hoping that institutional investors will come along for the ride, and not without reason. Factoring in the contributions of institutional investors, overall commitments to the funds BPC has invested in stand at more than £5.8bn, according to its latest results.

It is a somewhat brute-force approach, but one that will only work if BPC can show that such investments can generate a decent return. That picture is also beginning to materialise.
So far, BPC has delivered a “total portfolio internal rate of return” of 10.7% to the UK taxpayer, according to the results.

But that number is down from 13.3% in the previous year, which BPC says is a natural consequence of the “significant increase in commitments” made during the year to 31 March 2020. For the same reason, says BPC, its return on capital is down year-on-year from 8.2% to 7.4%. BPC made 405 total commitments in 2019/20, up from 334 the previous year.

It should also be noted that metrics such as internal rate of return are only useful as a means of forecasting potential gains, because the majority of those gains are as yet unrealised.
In other words, even companies whose value has increased likely remain privately-held – and so will not yet have delivered a return to their early-stage backers. The same is true of the funds that invest in them; it simply takes time for venture capital returns to materialise.

“While it is still early in the life of British Patient Capital and the funds to which we have made commitments, it is encouraging that we continue to achieve a positive return,” said Judith Hartley, chief executive of British Patient Capital.

With £1.5bn still to deploy, these annual updates will make for interesting reading in the years to come.

Creating that long-elusive British tech giant while delivering a potentially eye-watering return for UK taxpayers is a clear win-win. The reverse scenario – billions in taxpayer funds blown on risky, predominantly loss-making start-ups – would be a very bad look indeed.

Source: Private Equity News