A few weeks ago, Beauhurst released a brief report outlining the average returns of a sample of early stage companies in the UK over a 5-year period between 2013 and 2018.
In order to be included in the sample, the companies analysed had to meet the following criteria:
- Raised funds in 2013 with an observable valuation
- Had another known valuation afterwards, before the 30th November 2018.
It must be noted that these criteria imply a certain amount of ‘survivorship bias’, as while the report suggests that the calculated growth rates are valid for all private equities, it only considered those companies which managed to raise funds at a known valuation twice within 5 years, which, in itself, suggests that the company is doing quite well.
1,299 companies matched the criteria above. For the second point it is worth highlighting that the companies that failed (13%) were valued at £0. According to Beauhurst, almost half of the sample was at ‘Venture’ stage at the time of their latest valuation.
The combined value of the whole cohort at the point of entry was £5.93bn. This increased to £23.4bn by the end of the time period analysed. That’s almost a 5x increase in 5 years. The full cohort showed a Compound Annual Growth Rate (CAGR) of 23.7%.
The distribution of the returns is skewed strongly towards the higher end of the valuation axis, with a few high performers outweighing the majority of the sample, with a much lower CAGR. The most relevant value in this instance is probably the median CAGR, which was 19.44%.
83 companies (7%) from the sample exited between 2013 and 2018. These companies constituted £1.22bn at the point of entry (indicating they were already at a later stage than the rest of the cohort) and £3.12bn at the point of exit, resulting in a 26% CAGR.
162 companies (13%) failed during the analysed time period, so their value was written down to zero from the initial £366m.
Three sub-cohorts were also analysed to provide specific insight into relevant sectors, as well as to reflect the level of variance found in the sample. These are automation, electronics and life sciences.
This category includes businesses commercialising the benefits of automating processes that were previously manual and time-consuming. This includes varying degrees of complexity, ranging from cloud-based SaaS to artificial intelligence and machine learning.
97 companies in the sample matched this description, with a cumulative starting value of £790m. The companies (8 years old on average) amassed £1.22bn in investment – £12.4m each.
Their end value within the time period examined reached a cumulative £4.10bn, resulting in a CAGR of 32.7% and proving automation’s credibility as one of the sectors of the moment.
Only 4 of these companies successfully exited in the past 5 years, while 7 went bust. Such a low proportion of companies exited means that while the sector is performing above average, only a fraction of its value has been realised.
This cohort includes businesses within the pharmaceutical, clinical diagnostics, medical devices and instrumentation sectors. Of the 154 life sciences companies within the cohort, 66 of these are spin-outs from UK higher education institutions.
With a combined value that grew from £1.53bn to £5.55bn, the sector remains in line with the overall cohort average of a 22.2% CAGR.
13 of these companies exited within the past 5 years, being worth £131m at the starting point and totalling £661m exit value, resulting in a 28% average CAGR.
14 companies failed having started from a cumulative valuation of just £17.3m, an indicator of very early-stage businesses that never properly took off before going bust.
77 companies within the sample were categorised as ‘electronics’, typically the business of manufacturing hardware. These companies performed sub-par compared to the rest of the sample.
11 (one out of seven) went bust, only 8 exited and the overall CAGR was 18.4%
Comparison with public equities
The conclusion of the report is that private equities are potentially a much more profitable asset class compared to public equities. As a comparison, the FTSE100 has grown by 2.2% year-on-year within the same time period, without taking dividends into account.
While this conclusion must be considered with the aforementioned survivorship bias in mind, it is true that an hypothetical investor holding a portfolio with the whole sample analysed would have made very significant returns.
Finally, it’s worth pointing out that the conclusion did not take into account the benefits gained from EIS and SEIS schemes that might be applicable on the investments, considering that the vast majority of the sample would be eligible for either of the two schemes.