Are UK Venture Capital and Private Equity valuations accurate?

New research by the BVCA shows that UK venture capital and private equity firms do not overvalue their assets, and are on occasion too conservative. The report analyses the performance data of over 150 realised funds and finds that, contrary to some claims of over-optimistic valuations, there is no evidence to support such a charge. In fact, it finds that private equity funds are more likely to be conservative or even undervalue their assets in the early years of the investment.

The research paper - 'Are UK venture capital and private equity valuations over-optimistic?' - looks at all BVCA member funds which reached the end of their life between 1980 and 2009. The BVCA collects detailed and comprehensive data from its members on their cash flows as part of its annual 'Performance Measurement Survey'. From this, the report's authors calculated the Internal Rate of Return (IRR) for each fund for each year of its life. These yearly IRRs were then compared against the final IRR of each fund once it has reached the end of its life. In this way, it is able to compare how the valuations of the firm evolve over time: the greater the difference between the interim IRRs and the final IRR, the greater the over- or understatement of the valuation.

Participation in the 'Performance Measurement Survey' is a condition of membership for all UK-based BVCA member firms who raise funds from third party investors. As such, the coverage in the dataset is comprehensive, and not subject to reporting bias from funds choosing not to participate. BVCA members account for the vast majority of UK private equity firms. As a result, the BVCA's dataset is the most comprehensive and accurate database on the UK private equity market.

Notes to editor