Investing in our future: UK university spinouts reach inflection point

The UK university spinout sector, in our view, is a highly impactful asset class that can offer exposure to growth businesses across key industries such as healthcare, clean energy and advanced computing. As a result of maturing ecosystems around key university hubs and supportive government policies, we are now seeing the UK spinout market enter its next phase of evolution.

This unique combination has fostered an environment conducive to the growth of innovative businesses, where companies are now being built to scale and take products directly to market, as opposed to developing products for earlier acquisition by tech giants or large corporates.

As the sector enters the next phase in its evolution, we expect to see a UK spinout market which we believe will better facilitate the creation of global industry champions of the future, putting it on the cusp of significant growth. We believe there are three key themes, listed below, that could make this an attractive investment opportunity for institutional investors as they increasingly look to diversify their portfolios and potentially benefit from the growth of this sector.

1) University spinouts now display the key attributes of an institutional asset class

We are seeing increasing activity and evidence that the UK university spinout market is reaching maturity, with increasingly consistent activity across the whole investment lifecycle. This includes a growing quantity of spinouts emerging from the UK’s top research universities, increasing capital invested in the sector, evolving investment models, and continuing examples of successful companies exiting via mergers and acquisitions and the international public markets.

2) Ability to access the sector via emerging ecosystems built around key university hubs

The highest volume of spinouts and most successful exits have originated from universities centred around Oxford, Cambridge, London and key universities in the North of England. These areas have become innovation ecosystems in their own right and include some of the most established university investment platforms with increasingly proven approaches to early-stage business building.

3) A gap in the market offers a potentially attractive entry point

Maturing portfolios at university-linked investment platforms have led to a growing number of scaling companies that are now seeking funding. This is alongside normalising market valuations and supportive government policy for science and technology. Capital exists at the early stages, via the established ecosystem of VCs and university-linked investment platforms, and at the later stages, via generalist institutions looking to invest against traditional financial metrics. There remains a gap, however, between these two stages. This is represented by companies scaling up through early commercialisation and before they can be viewed as generalist investments applicable to the broader capital markets.

We believe this market gap is likely to persist as fundraising for new managers looking to solve this problem continues to be subdued and the ability for most large generalist investors to access companies at this stage remains operationally difficult.

However, we believe it represents an attractive and less competitive point in the market to access the best companies and then use this access to support them with longer-term investment as the companies de-risk and scale. In our view, this model can be especially powerful when access is combined with strong partnerships across the universities and their early-stage investment platforms.

Read our full report on the UK universities spinout sector.

Key risks:

For professional investors only. Capital at risk.