Video: arduous road for emerging managers, says British Patient Capital's Connatty

Set up in 2018 by the British Business Bank, British Patient Capital (BPC) recently released its second set of full-year results and annual report, having now committed a total of £1bn to the UK-based venture and venture growth sector across 42 funds. For the 2019/20 financial year, the team made 11 new commitments to the tune of £405m, compared with 12 worth £334m in its first year of operation to March 2019.

Of the £405m committed over the past year, £350m was allocated to new funds and £55m to existing funds; and of the 11 new commitments, six were to new fund managers and five were to fund managers to which British Patient Capital had previously committed. The team now has exposure to 503 underlying portfolio companies compared with 322 in the previous year.

In a video interview before BPC's annual results were released, head of funds Ian Connatty told Unquote that, though there have been investments in early-stage venture, the focus has been later-stage venture investments in 2020.

He also said that, although the team had committed to some debut funds, emerging managers faced obvious challenges: "The current circumstances favour established managers a bit more in an era of doing due diligence virtually; if you have a number of established LP relationships, in our experience it is a lot easier to raise money if you have the relationships rather than trying to form new ones."

New commitments in the past financial year included a £25m investment in Oxx Capital's debut fund; a $50m investment in Atomico's fifth fund; $45m in Balderton Capital's seventh fund; and a $65m cornerstone investment in SV Health Investors' first dedicated biotech fund.

Other fund relationships include: Active Partners, Alpina Partners, Advent Life Sciences, Amadeus Capital Partners, Atlantic Bridge, Connect, Crane, Dementia Discovery Fund, Draper Esprit, ETF Partners, FPE Capital, Frog Capital, Hoxton Ventures, IQ Capital, Kennet, Kester Capital, Kindred Capital, MVM, Naut Capital, Notion, NVM, Panoramic, Prime Ventures, Seedcamp, Scottish Equity Partners, SV Wealth Investors, UCL Technology Fund and WestBridge.

Catalyst
At launch in 2018, BPC set out to invest £2.5bn in the UK's high-growth innovative companies over the following 10 years, with the hope of attracting an additional £5bn to the sector through other LPs.

The idea was to see more home-grown and fully funded high-growth companies emerge as significant players on the global stage. The lack of patient capital has historically been a stumbling block for many firms, resulting in them being sold too early to trade buyers. With more later-stage funding available, the hope is that companies can achieve scale as independent businesses within the UK.

"One of the reasons we want to shine a light on the whole [venture] asset class is because if you look at the structure of funding in the UK VC market, it is very different particularly to the US – which is usually funded by long-term investors like US pension funds. We don't have that depth of institutional investors here in the UK and generally in the European VC market. And that is something we feel that needs to change if the industry is going to scale and really close that later-stage gap with the US."

The team also continues to invest £250m on behalf of the Nuclear Liabilities Fund (NLF), for which it received the third-party investment mandate in April 2019. The mandate supports the primary objective of the NLF to achieve sufficiency of the fund to meet certain costs of decommissioning EDF Energy's eight nuclear power stations that are currently operating in the UK.

Though technically sector-agnostic, eight investment themes have now emerged for BPC: future of work and education (19%); marketplaces and consumer (18%); digital health and life sciences (15%); big data and AI (13%); fintech (13%); clean growth, sustainability and mobility (9%); cybersecurity (5%); and "frontier tech" (5%).

"One of the things that Covid-19 has done is shine a light on life sciences and digital health. But interestingly, most of our digital health exposure comes from generalist technology funds rather than specialist life science funds and I would expect this to continue," says Connatty.

Looking ahead, there has been talk about the establishment of a separate IR team in order to attract third-party capital, and though this is still a consideration there are no immediate plans, Connatty says: "The idea is to build a portfolio and track record that can help and at some point be transferable into the private sector. But currently most of our institutional work is about working with institutions and around VC generally, and we'll take it from there as the years go on."

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