The shift in holistic asset allocation from public to private markets has been evolving and gathering pace over the last 10 years or so.
Previously we saw family offices and ultra-net-high-worth individuals allocating increased capital allocations into private equity, now we are seeing this trend expand into the venture capital space.
Throughout my time as a private banker at CitiBank and now in my current role at QVentures supporting family offices to preserve and grow their wealth, I have witnessed first-hand my clients investing more into venture capital.
While this shift has been gradually picking up over the past 10 years, the current macro environment, among other reasons, has helped this trend grow considerably.
4 reasons why it’s a good time to invest if you’re a dollar investor
Here I will explore the top four reasons why it’s a good time to invest in UK start-ups if you’re a dollar investor.
#1 – Currency wings
The dollar/pound exchange rate has dropped to its lowest position since 1985, a position which is not likely to change in the short term.
With the pound trading at a discount to historical averages, exciting opportunities are presenting themselves to the dollar investor in the private companies market. Dollar investors should be investing in UK-based companies now as currency tailwinds make them a more attractive proposition.
This opportunity will allow investors to aim to liquidate their investments in three to five years’ time when the pound has recovered. At this time, if sterling moves back to circa 1.30 against the dollar, the FX transfer back into dollars could give investors a 20 per cent return on top of the portfolio performance.
Interest from US investors has already accelerated over the past two years, as US investors took part in more than €70 billion worth of VC deals in Europe last year, having identified the opportunity early to access quality deals at better prices.
>See also: Who are the UK’s next unicorns?
#2 – Better terms and better priced deals
In comparison to last year when hyper inflated valuations were the norm, the market is now heading towards a reset. Public markets are seeing valuations down more than 50 per cent from their all-time highs, and public market SaaS multiples trading at 80 per cent their value, down from 50.8x to 8.8x today.
The artificial demand for cloud products was, in large, part driven by the unique circumstances brought about by the pandemic, which made it impossible to go to the office or to shop (shoutout to the Zoom and Shopify bull-run), and in turn explains why a market correction was due once “normal life” resumed.
According to Crunchbase, the normalisation of the market makes the ecosystem more investor friendly as funding rounds are less competitive, allowing more time for due diligence and getting to know founders. This has also led to more favourable negotiations for investors around deal terms, such as liquidation preferences, redemption rights, ratchets and tranched financings.
Additionally, recent reports find that European VC now outperforms European listed equities, private equity and US VC across a one, three, five and 10-year horizon. While this may surprise some, the research reinforces the investment argument for allocation to UK private companies for dollar investors within the current economic climate.
#3 – Increased M&A activity from US tech companies
As the number of innovative and revenue-generating UK companies continues to grow, US companies will continue to look across the pond for acquisition opportunities – even more so given the current market pullback and the recent depreciation of sterling. Opportunistic US companies screening potential UK investments will find strategic acquisitions easily justifiable given the steep discounts that quality UK assets are trading for.
Additionally, UK founders who are looking to exit are likely to be more inclined to explore trade sale opportunities while the public markets remain largely closed to new issuers given the ongoing volatility amid a rising interest rate environment. Data from Beauhurst reports that US takeovers of UK start-ups have risen to a record-breaking 130 firms since the beginning of this year.
#4 – More portfolio diversification
The argument for the allocation of investable assets into private companies is now stronger than ever.
Prior to QVentures, I was at CitiBank serving clients with an average net worth of $250m globally. I worked specifically with family offices and UHNWIs to successfully create asset allocations across, equities, bonds, commodities, private equity and hedge funds.
In my experience, private markets tend to have less correlation to public markets in times of economic contraction. They also have the potential to deliver enhanced long-term returns to complement the lower-yielding lower risk asset classes across their allocations.
Nick Hill is a principal at QVentures focusing on family offices. Previously he worked at CitiBank