British Patient Capital to invest £2.5bn into UK venture funds

The UK’s most active venture investor is on a mission to be a cornerstone LP in regional venture funds and to spark other institutional investors to get involved along the way.

British Patient Capital, a wholly-owned commercial subsidiary of the British Business Bank, is looking to give some momentum to the UK venture market. The organization aims to invest £2.5 billion ($3 billion, €2.7 billion) into UK VCs over a 10-year period, starting in 2018.

The organization was launched two years ago in response to government research showing that while the UK was a great place to start a business, capital was lacking for companies once they really got going, says Catherine Lewis La Torre, chief executive of BPC.

“It’s much more challenging to find a tool for that,” La Torre says. “In the UK, lots of entrepreneurs are forced to, frankly, get on a plane and go look for capital in other parts of the world.”

Formed to close the funding gap

BPC was started to help close that funding gap by helping build those venture funds so that UK companies can continue to tap British capital as they grow.

“What we’ve been surprised about is the level of demand out there in the UK and Europe for our capital,” La Torre says. “There’s definitely a thirst for capital from venture funds and growth funds out there in the market looking to raise decent-sized vehicles.”

These UK venture funds have had trouble raising capital due to the gaps in institutional funding coming from other investors. Many LPs in the UK still generally avoid the venture asset class because of the risk profile associated with it, and with a less mature venture market than the US, some funds have trouble securing foreign LPs as well.

“If you have a sensible investment strategy in this area, you can make good returns for your constituents,” La Torre says. “We’re going to try and show the way by building a diversified portfolio of venture managers to demonstrate over time how other institutions could do that for themselves.”

BPC hopes their efforts will bring an additional £5 billion of capital from UK LPs looking to get involved with their mission and the venture asset class.

BPC looks to invest £300 million-£350 million a year over the next eight years. The organization typically takes a cornerstone investment of between £20 million to £40 million but can invest up to £100 million in a single transaction.

“We work on the assumption that we’re going to have to be a significant investor, if not a cornerstone investor, to get other investors introduced into those funds or to get that fund to a size where the investment strategy really makes sense,” La Torre says.

UK focus

The organization started with a portfolio of seed investments worth about £300 million that it purchased from another subsidiary of the British Business Bank. As of March 2019, BPC had about £600 million invested across 31 vehicles, and had invested £334 million in its first year.

The organization is targeting funds that are bigger than £50 million that mainly focus on the UK. La Torre says they also invest in firms with a pan-European strategy, if the firms invest in UK businesses.

BPC invests across seven sub-sectors within enterprise technology and is finding particularly attractive opportunities in the fintech and life science verticals.

“What we don’t want to do is to be overly exposed to any one of those things,” La Torre says. “We think a good protection as an investor is that we have a broadly diversified portfolio by sector and also by vintage going forward.”

BPC doesn’t currently co-invest alongside its fund partnerships, but La Torre says that idea is on the table and is something they are looking to adopt over the next few years.

The LP committed to two funds in February. The organization invested $50 million into Atomico V, which was able to close on a $820 million fund in February to invest in technology companies at the Series A round or later.

BPC also made a £25 million commitment into Oxx Fund I. The vehicle closed on £63.3 million to focus on B2B SaaS companies in February. The firm, with offices in London and Stockholm, typically invests after Series B.

In the past year, the fund also invested into such funds as IQ Capital Fund III, which focuses on deep tech, Balderton Fund VII, a Series A technology investor, and Crane I, a deep tech investor.

While the organization has invested in multiple emerging managers and some first fund vintages, La Torre says emerging managers aren’t their focus. BPC would prefer to invest with firms that have a longer track record. But due to the nature of the UK venture market, the majority of firms are still somewhat emerging.

She adds that they are open to working with new or specialized strategies from managers and those with a younger track record if the firm’s strategy make sense overall.

“What we’re not doing is first-time teams without a quite developed track record,” La Torre says. “So, even the emerging managers that we’ve brought into the portfolio, they’ve had quite a long track record that we could evaluate before supporting the fund.”

Performance is everything for this new LP because the cashflow from the British Business Bank isn’t a permanent setup. Once BPC deploys the current funds, they will be looking to raise outside capital in a more fund of funds model.

“The idea really is the British Patient Capital is a catalyst, a fund that manages to raise significantly more capital because it has us as a cornerstone, because it’s got off to a good start,” La Torre says. “Momentum is very important in fundraising.”

As the coronavirus began to snarl markets worldwide, La Torre and BPC released a message in March that they still want to work with firms and that they are most certainly still open for business.