• First-time funds have raised $4.7bn in 2019 -21 – double that raised in the previous three years
  • Niche, targeted, tech-focused strategies have been particularly well-regarded
  • The ESG movement has generated greater appetite from investors

Google the venture firm 2150 and you won’t find an investment strategy but a manifesto. 

In it, the less than two year-old firm sets out its vision to “re-imagine” the ‘urban stack’ – every element of the built environment that makes our cities globally. It says it’s “taking on the biggest sustainability challenge on the planet” and hopes to “make the world of 2150 one we actually can and want to live in”.

The language speaks to the socially conscious and specialist investors and founders that a new wave of venture funds is targeting in a booming UK market.

Fundraising for all UK-based venture funds hit a record $7.2bn (€68bn) last year. It followed the previous record fundraising for first-time UK venture funds in 2020, when they collected $3bn – or half the total capital raised that year and their highest proportion of all fundraising since 2008, according to data provider Preqin.

First-time funds have gathered pace, raising $4.7bn between 2019 and last year, about double the capital they achieved in the previous three years.

Impressive returns and strong distributions from venture and private equity funds have boosted commitment levels from investors, says Dan Aylott, head of European private investments at investment adviser Cambridge Associates.

“First-time funds present some challenges for investors in terms of getting comfortable,” he says. “Given the success of their private markets allocations in recent years and the performance coming out of venture portfolios, investors have become more confident about taking more risk on first-time funds.”

“The pandemic really has accelerated the technification of every part of our lives,” he adds. “Across technology, healthcare, and fintech, for example, we have seen a huge acceleration in all those sectors and strategies in the last few years, so that has driven strong returns from venture capital…. and more interest and appetite for venture capital from investors as a result.”

Niche appetites

A list of the biggest first-time UK venture funds raised in the past 12 months reflects the increasing focus on niche strategies – and appetite from investors for returns beyond the financial. 

“We’re seeing people come out to market with targeted strategies…. If you’ve got a broad, diversified portfolio of funds that’s performing well, adding new names to that portfolio has to be done in a thoughtful way, where you’re adding differentiated exposure, and targeted sector-focused funds can play that role for the investor,” says Aylott.

“There’s certainly a sense of people grappling with what is going to be the next big leap and what are the things that are going to disrupt,” says Jonathan Cohen, a partner at law firm Ashurst. “Having an understanding of the sector helps you spot them better.” 

The largest single fund raised in the past year is 2150’s Tech Sustainability Fund, which raised €270m ($285m) for its oversubscribed vehicle at the end of the summer, according to a statement.

Its commitments came from institutional capital and family offices including Danish investment firm Chr Augustinus Fabrikker, Denmark’s Green Future Fund and Novo Holdings alongside more than a dozen European real estate owners and developers which, 2150 says, will benefit as potential customers for the sustainable technologies that the fund backs. 

Credit Suisse, Norwegian sovereign climate investment company Nysnø and Woven Capital also backed the vehicle.

ESG momentum

Dan Aylott

“investors have become more confident about taking more risk on first-time funds”

Dan Aylott

It is not just highly specialist strategies that are winning over investors. The environmental, social and governance (ESG) momentum building in investment management has led to greater appetite from investors for funds that aim to deliver positive impacts for society.

Preqin said in its ESG in Alternatives Report 2021 that there were $3.1trn of private-capital assets under management by firms committed to ESG as of October 2021. The figure compared with $8.52trn of total global private capital assets.

“We’re seeing, for sure, a wave of new investors in private capital who are a bit younger and are incredibly socially conscious about how they want to invest and they want to make sure they get a return but they’re doing it in the right way,” says Cohen.

 “For some of [our investors], this is their first investment in a sustainable fund,” says Nicole LeBlanc, a partner at 2150. “They see us as an extension of their team as a way to solve their problems.”

Questions have long surrounded such funds’ ability to compete on financial returns. The average net internal rate of return – an annualised measure of performance – is just 9.61% for global venture impact funds, compared with 20.23% for all global venture funds, according to Preqin.

“We don’t feel there has to be a trade-off anymore in terms of the returns you can expect from investing in impact funds but you still have to pick your managers carefully,” says Aylott. “The manager has to be right [and] the talent of the GPs has to be strong.”

“You don’t have to sacrifice one or the other to build an amazing portfolio and work with amazing companies,” says LeBlanc. “We’ll also provide market returns because to meet the 2150 goals as a society, solutions have to be…. adopted by the mass market at scale. That’s where we’re trying to play .”

Meanwhile, anecdotal evidence suggests first-time venture funds are competing strongly with their established rivals despite the risk typically associated with backing a new firm.

Figures from Preqin underscore this risk. Its most recent data – all funds that have reported performance in the last five quarters – shows first-time UK-based venture funds have returned 18.34%, compared with 22.35% returned by all UK-based venture vehicles.

“Some LPs will not invest in first-time managers. What surprised me was because of the message we had and the sector we’re focused on that a number of LPs who would normally have that position… were willing to waive it because the sector was so important to them.”

For entrepreneurs, niche knowledge is the primary consideration, says Cohen. “My experience with founders is if they haven’t got that click with whomever is the key person who will work with them day to day, they don’t really want to work with you… If I’m a deep tech firm and I’m looking for money, do I want a generic VC firm or someone who absolutely knows this space, knows these players and knows what’s happening in the market?”

Levelling up in the UK

The outlook looks positive for new funds, particularly amid the UK government’s aim to spread innovation and opportunity more evenly across the country through its so-called levelling up agenda – a plan that LeBlanc believes has the potential to encourage innovation outside the biggest urban areas by shining a light on research initiatives in small university towns.

Jonathan Cohen

“There’s certainly a sense of people grappling with what is going to be the next big leap and what are the things that are going to disrupt”

Jonathan Cohen

“If you have successful founders across the UK taking businesses from nothing to potentially billions of pounds and the UK government continues to provide support to enable this across all of the UK, that’s levelling up,” says Cohen.

However, challenges are on the horizon, and not just the impact of inflation on consumers’ pockets. The weight of capital in the market – and its effect on investors’ commitment budgets – concerns Aylott. He highlights that managers speedily returning to market for their next fundraising may face problems securing commitments from LPs that plan their allocations over the long term. 

It follows rapid deployment of capital – UK venture deal values hit a record $34.1bn last year, according to Preqin, surpassing the previous record of $19.2bn in 2019.

“For first-time funds, it’s an especially important issue to think carefully about who your LPs are, and their ability to support you in future fundraising and be very transparent about the frequency of fundraising so commitments can be right-sized at the outset,” says Aylott.