BVCA moves to free up flow of pension fund cash to UK innovators

By 2030 – and it certainly seems a long way off – the UK’s leading pension providers will be moving away from defined contribution funds, with the aim of increasing their returns to savers while also directing additional capital. At least 5.0% should be allocated to unlisted assets. Become a high-growth scale-up company.

This should be good news for young companies looking for the capital they need to grow, but many of the details are still being worked out. British pension funds do not have a track record of investing in unlisted companies, and the structures that allow them to do so are not yet in place. To move things forward, the British Venture Capital Association announced this week that it will convene an industry committee aimed at identifying and breaking down barriers to investment.

So what are those barriers? And more importantly, what does the allocation of pension fund funds mean for young companies entering the scale-up phase of their development?

The UK innovation ecosystem continues to face structural challenges when it comes to funding. Broadly speaking, companies seeking seed and Series A funding have good support from domestic and European VCs. Problems tend to arise further up the funding ladder when large amounts of capital are required to scale domestically and internationally. In fact, late-stage investing “decelerated significantly” in 2023, according to research published earlier this year by HSBC Innovation Banking.

Capital is available, but much of it comes from North American or Asian investors. Money is money, so recipients are unlikely to complain, but from a British perspective, the most successful British companies are shifting their focus overseas, and when the time comes for an IPO, they’re in New York instead of London. There is a risk that the company may go public.

new investment vehicle

Last summer, pension funds agreed to a so-called Mansion House arrangement that allocates more money to innovative growth companies. Meanwhile, Chancellor of the Exchequer Jeremy Hunt announced plans to consider creating new investment vehicles through which pension funds could flow.

The move was welcomed by the industry. For example, Nauren Zahid, investment director at VC OpenOcean, said at the time: If executed effectively, this could be a transformative moment for UK technology. ”

The challenge now is to make it work.

Why is this important?

So why is this important? The obvious answer is that the UK pensions industry is Europe’s largest, with £2.5 trillion in assets under management, and fast-growing high-tech companies in the climate change and life sciences sectors, for example. Allocating 5.0% to is, in theory, a game changer.

But can cash-hungry businesses actually see a difference? Kerry Baldwin, managing partner at IQ Capital, chairs a panel of experts convened by the BVCA. In her view, the move to tap pension fund resources could fill a gap in the funding market where companies need very large amounts of capital. Baldwin explains the problem.

“Our fund is a certain size, so we can only invest in a certain size round,” she says.

In practical terms, this may mean that companies looking to expand internationally have to make compromises when it comes to hiring. For example, they may not be able to afford to hire a product marketing executive with the right track record and ability. Pension funds that invest in partnership with VCs and private equity funds may be able to address this issue.

“It’s going to allow entrepreneurs to get the rounds they need and the talent they need,” Baldwin said.

What happens during the internationalization phase can be crucial not only to the health and well-being of the companies themselves, but also to the UK’s innovation economy. More local investment will naturally encourage British companies to continue to focus on their home territory. Foreign investment would probably be counterproductive.

barriers to investment

Pension funds do not agree to the 5.0% target out of altruism. For savers, there is an opportunity to secure higher returns. According to BVCA figures, his 10-year return for Private Capital Industries is 17%, while the FTSE All Share Index’s return is 6.5%. That potential is highlighted by Onward’s research, which looked at returns from Australian, Canadian and US pension funds that invest in private companies. It suggests the Mansion House deal could give savers an increase of £97,000 over 35 years.

However, directing funds to private companies is not easy. For example, there are concerns about investing in “illiquid” assets and the associated costs.

Hence the BVCA panel. “We are working to remove that barrier,” Baldwin said. “There is a commitment to finding a solution in time.”

“Some of the discussions have focused on the relationship between pension providers and venture capital and growth equity funds. We need to understand how we can work together. For example, what will be the fees? Is that so? How should I report it?”

Therefore, there will be a strong focus on practical solutions. But what about broader issues of culture and knowledge? Pension funds are stewards of savings funds and are adept at balancing risk and return. But is it reasonable to expect them to understand the risks associated with technology startups and scale-ups? Do they have the necessary internal knowledge? For example, regarding post-IPO investments. , it has been noted that pension funds appear to be most comfortable with traditional industries such as minerals and fast-moving commodities rather than technology.

I think Baldwin is a bit mischaracterized here. “Pension funds understand this area,” she says. As she points out, they are already making investments, albeit on a very small scale.

And perhaps more importantly, the investment is not in a high-risk startup with a few employees and a great idea, but in a more established company (perhaps 500 employees) that has already gained market traction. This means that there is a high possibility that it will be directed to

Obviously, none of this makes much of a difference to today’s generation of companies in their growth stages. The challenge for investors will be to unlock what Jeremy Hunt hopes will be “billions of pounds” of investment.