LONDON – High technology investments in the United Kingdom have produced an average return of 23% per annum and a return multiple of 2.9 times cost during their lifetime, which should challenge institutional preconceptions regarding the performance of such venture investments, according to figures released by the British Venture Capital Association (BVCA) in conjunction with The WM Co.
The first-of-its-kind survey, which covers the period from inception to December 1998, was undertaken on a “by investment” basis to give a more precise picture of returns derived from high-technology deals. In previous BVCA/WM performance surveys, returns from such investments were aggregated within the early-stage and generalist fund categories and have therefore been masked.
As ever with performance surveys, considerable variations underlie the pooled figures. Early-stage investments in the communications sector emerge as the real winners, delivering a staggering 58% IRR, equivalent to a cost multiple of 7.7. Buyouts and buy-ins of communications companies were also strong performers, returning 4.7 times cost to investors, corresponding to an IRR of 31%.
The survey shows that, in sharp contrast to the U.K. fund population as a whole, in the high-tech sectors, early-stage investments have outperformed buyouts, generating an annual IRR of 28.3%, compared with the 19.5% delivered by buyouts of technology-based companies. Expansion stage investment in the high-tech sectors produced a 15% IRR, returning 2.2 times cost; within this stage category, information technology companies performed better than biotech/health-care, communications or electronics and engineering deals. Communications sector deals outperformed IT investments at all stages except expansion, where IT companies delivered an 18.8% IRR to investors and a cash multiple of 3.7, whereas similar investments in the communications sector generated an annual return of 17.5% and a 1.9 multiple of investment cost.
Electronics and engineering investments showed the lowest overall returns and – somewhat surprisingly – were outperformed by biotechnology/health-care sector deals at every investment stage.
It is difficult to compare the figures for U.K. high-tech performance with venture fund returns in the United States because the “by investment” methodology used in the U.K. fund survey differs from the fund analysis used by Venture Economics Information Services (VEIS), a sister company to VCJ, to find benchmarks in the U.S. As a yardstick, however, according to VEIS’ Investment Benchmarks survey, the cumulative capital-weighted IRR at end December 1998 for U.S. early-stage funds was 21.5%, for seed funds 7.6%, for balanced vehicles 14.3% and for later-stage venture funds only 1.5%. It should be noted that these figures apply to the entire spectrum of venture funds rather than purely to high-technology vehicles.
The U.K. survey also explodes the myth that early-stage investments have extended exit horizons. Overall, high-tech investments are held for an average of 4.6 years from initial investment to exit. The average life span for exited early-stage investments, however, was just 3.6 years, compared with 4.5 years for buyouts and buy-ins and a full five years for expansion-stage deals. Biotechnology and health-care deals had the shortest exit horizon overall, thanks primarily to the brief duration of buyouts and buy-ins in this sector. Although the average time to exit for biotechnology buyouts is 2.6 years, expansion-stage deals in the sector were held for an average of 8.4 years, with a number of such investments having lifetimes of more than 10 years.
Paul Castle, the chief executive of MTI Ventures, one of the U.K.’s longest established early-stage high-tech specialists, was instrumental in the development and design of the performance survey. A longstanding advocate for early-stage technology investments, Castle is clearly delighted with the findings of the survey, which confirms the arguments MTI has consistently held. “Although it is too early to have had much market feedback on the survey’s findings, the initial response from opinion formers has been good, and the survey appears to have put technology investment center stage,” Castle said. “It demonstrates that the results from technology investments, which previously have been subsumed in the aggregated fund performance figures, are very good, and shows that the returns from early-stage deals are the best of all.”
Although the performance data may come as a revelation to some institutions, it held no surprises for MTI, Castle said, pointing out that the figures “confirm what MTI has been saying for the last 16 years.”
Any impact the survey may have on U.K. institutional attitudes to venture investing will take some time to make itself felt. While its findings are encouraging, institutions are likely to wait until a body of data has been built over several years before making any radical revision to their investment criteria. Nevertheless, as Duke Street’s Edmund Truell, chairman of the BVCA Investor Relations Committee, observes, “These are outstanding returns. If U.K. pension funds take account of these figures along with the figures in our annual performance measurement survey, it clearly must be time for them to re-evaluate their out-of-date view of venture capital investment and acknowledge its merits.”