UK venture capital companies are inviting retail investors to help back early-stage entrepreneurs, opening up part of the market that has been hard for private investors to access, but which also carries particular risks.
Forward Partners, a venture capital company, will include retail investors in an initial public offering that it plans to launch in the coming weeks, raising a total of £30m in new cash, according to people familiar with the company’s plans.
The London-based company will join listed venture capitalists Draper Esprit and Augmentum, which have also opened recent fundraising rounds to retail investors, alongside other backers, using the PrimaryBid platform.
Interest in private assets categories such as venture capital has surged in recent years as the investment industry grapples with low returns in the public markets. The private capital industry has grown threefold in the past decade to $7.4tn, according to Morgan Stanley.
Retail investors have typically had less access to these potentially lucrative opportunities. Venture funds have often been unlisted vehicles with high minimum investment hurdles and targeted at institutions and wealthy individuals.
The trio of UK venture capital companies see their fundraisings as a step towards opening up the asset class, but some in the industry are concerned about the risks private investors will run in search of higher returns.
“Private markets are an exciting area which are usually impossible for normal investors to get a slice of the pie,” said Alex Davies, founder of Wealth Club, an investment service that helps wealthy clients select private investments. “That said, this is risky stuff. Many of the underlying businesses are relatively early stage, heavily loss making and illiquid.”
Venture funds see opportunities in backing these young businesses, and argue that investing in a company that has a large portfolio of start-ups helps to diversify the risk to investors of individual entrepreneurs failing to deliver.
“No one is pretending that this is low-risk, low yield. This is something for you if you want an allocation to growth and have an appetite for risk,” said Tim Levene, chief executive of Augmentum, who began his own career as an entrepreneur founding a juice bar and later helped launch online betting company Flutter.
Augmentum was the first UK-listed venture capitalist to tap retail investors on PrimaryBid last October, and is now raising a further £40m, including from private investors. “We’ve really promoted actively, bringing in more retail,” said Levene.
Forward Partners will also use PrimaryBid to include retail investors in its planned IPO, targeting a £125m valuation. Founded in 2013, the venture firm is backed by BlackRock, the US investment house.
Fund managers argue that going public gives them more flexibility and access to longer-term capital compared to standard VC fund structures that tie up investors’ money for a fixed period subject to a set of conditions.
More companies have started to include retail investors in public offerings, as a way to attract attention, build loyalty or to engage with “stakeholders” as part of their agenda on environmental social and governance (ESG) issues. However, the leading example to date turned into a cautionary tale as 70,000 Deliveroo customers who participated in its April IPO were burnt as the share price dropped.
The push to open new opportunities for retail investors comes after a review of London markets by former EU commissioner Lord Jonathan Hill recommended measures to encourage private investors to participate in IPOs.
The UK government has long been keen to encourage investors to fund British tech start-ups. Venture Capital Trusts (VCTs), a class of listed investment trusts specialising in VC, enjoy income tax relief but are limited in the investments they can make.
Some longtime investors still doubt the UK’s ability to incubate winning businesses. Baillie Gifford fund manager James Anderson, known for his bold bets on companies such as Tesla and Amazon, told the FT that a “deep sickness” in UK capital markets has stifled the success of homegrown entrepreneurs.
The Scottish Mortgage manager was an early advocate of investing in private companies with high growth potential to capture the full scale of their returns.
Martin Davis, Draper Esprit’s chief executive, said companies were tending to remain private for longer, limiting the opportunities to invest in them via public markets. “The traditional drive to go public to access deeper pools of capital is less of a priority,” said Davis.
Draper Esprit, which raised a total of £111m last week, said the retail portion of its fundraising was 40 per cent oversubscribed. Draper itself is an investor in the PrimaryBid platform, which facilitates retail investors joining public offerings and fundraisings — with a typical minimum investment of about £500.