@PLSA.
Investors are being urged to help unlock the “gold mine” potential of the UK’s “dynamic and innovative business ecosystem”.
Louis Taylor, Chief Executive of the state-owned economic development bank the British Business Bank (BBB), said that institutional investors needed to look closer to home when seeking growth opportunities. The call was also relevant to investment teams at insurance as they look for new opportunities.
“It is a really significant and underappreciated wealth of opportunity for UK institutional investors, and it's right on our doorstep,” he said. “It is the UK's world class innovation ecosystem and our entrepreneurial culture, which generates some of the most exciting investment potential.”
Taylor was addressing delegates at the Pensions and Lifetime Savings Association’s (PLSA) annual conference in Liverpool last week.
Institutional investors had the power to help create cohorts of science and tech-led scale up companies, he said. Taylor’s audience included both life insurers, pension providers, pension trustees and pension scheme sponsors.
“At the bank, we've been investing in start-ups for the entire
10 years of our existence."
He said these companies were “mostly not represented in the portfolios of our pension capital pool, which, of course, itself, is the second largest in the world”.
Countries that had innovative entrepreneurs backed by pools of long-term domestic capital, “ambitiously invested in productive growth”, were the ones now succeeding and employing more people and creating wealth, he claimed.
Pension funds had a disproportionately low holding in UK start-ups.
“At the bank, we've been doing this – investing in start-ups – for the entire 10 years of our existence. The British Business Bank is, in fact, the UK's largest domestic investor in venture and growth equity in the UK, and we're the most active late-stage investor,” he said.
Taylor told delegates he had been at the UK international investment summit earlier that week, where the Chancellor of the Exchequer Rachel Reeves had announced the creation of a UK National Wealth Fund to mobilise clean energy and growth industries.
“We have four objectives, one of which is ensuring that innovative
businesses can access the right capital to start and scale."
Taylor explained the British Business Bank did not lend directly but acted as an introduction to 200 delivery partners, their banks, their alternative finance providers, and their fund managers.
“Our mission is to drive sustainable growth and prosperity across the UK and to enable the transition to net zero by improving access to finance for small businesses.”
“We also have four strategic objectives, one of which is backing innovation, ensuring that innovative businesses can access the right capital to start and scale.
“We draw on a permanent capital base now of around £8 billion and while some of our activities are subsidised, we have regularly been investing around £600 million pounds a year into purely commercial opportunities.”
He admitted that some of the businesses backed by the BBB did not make it. “We support a very large number of companies that will never be unicorns, and that is absolutely fine, because our economy needs a vibrant and broad small business sector, but it is great to be backing companies that achieve stellar growth.”
He cited examples of breakthrough British companies that it had financed such as the bank Revolut and loans company Lendable in the fintech space, Thought Machine and Quantexa in the artificial intelligence (AI) and Wave and semiconductor Graphcore in the broader tech space.
“Companies such as these are key to driving future growth and prosperity in our economy,” he said. “Lots of people here will have used [patient care platform] Accurx. They will have booked their first Covid vaccination [through them], like 40 million others.”
He added that the business is one of Europe's fastest growing healthcare platforms, working with around five million patients in the UK alone every week.
“It was not only key to rolling out the Covid-19 vaccination programme. It now brings productivity-improving technology to the NHS with 98% of GP practices using it to reduce no show appointments by up to 50%,” he said.
“Even in Europe, where pension schemes are far less funded than
in the UK, they manage marginally better than the UK."
Taylor also talked about Pragmatic semiconductor as an example of “exactly what we want to happen more in the UK”. “Pragmatic is a UK company that developed a technology at Cambridge University to make semiconductors on a flexible polymer substrate, rather than rigid silica, and doing so at a tiny fraction of the cost of silicon equivalence.”
“Pragmatic is currently ramping up production to produce billions of chips in Durham, following a £182 million pound fundraise to build a plant financed by, among others, the British Business Bank at three different stages of the company's development.”
Another aspect of the session was the wider ecosystem in which this was happening. The UK was home to three of the top 10 universities globally and 16 of the top 100, Taylor said. “We lead the world in top ranked research publications; only the US, Switzerland and Sweden rank above us in the OECD Global Innovation Index. We are a hub for genetics and genomics insight, a front runner in climate tech and a leader when it comes to quantum computing and nanotechnology, but without scale up capital coming in at least a good part from domestic sources we will be a country that only incubates companies developing these technologies.”
Taylor urged investors to diversify their portfolio by investing more in the UK. He said at each funding stage start-up US companies tend to raise double or more what UK companies raise.
He addressed pension funds directly: “UK pension capital represents 10% of our venture capital pool, compared to 72% in the US.”
"The Australian superannuation fund announced a £5.25 billion
commitment to the UK and Europe."
“Even in Europe, where pension schemes are far less funded than in the UK, they manage marginally better than the UK,” he said.
In Canada, pension funds invest 15 times the amount UK pension funds invest in private equity and venture capital. “In Australia, defined contribution (DC) pension schemes have over 20 per cent in a range of illiquid assets, and that has been the most successful DC program in the world, generating around 11% return on investment in each of the last 20 years,” added Taylor.
“In November last year, the Australian superannuation fund, the Australian super announced a £5.25 billion commitment to the UK and Europe via its newly established London office," he said. "Direct investments from these new headquarters will include private market investments with an emphasis on innovation, life sciences and the digital infrastructure sector.”
Taylor was upfront in the challenges faced by pension funds and their need to follow their fiduciary duty, in providing both value for money and the best outcome for members. “With that comes the balance of risk and reward in the interests of the beneficiaries,” he said. “These decisions can be complex and challenging.”
He added that there were barriers that have historically prevented pension funds from investing in venture at scale – such as the resources required to sufficiently scrutinise or assess the market for opportunities and then actively manage those investments
The BBB believed the retirement savings of the average 22-year-old could be increased by as much as seven to 12% through just a small allocation to venture capital and growth equity funds.
“There is a shift in market sentiment to acknowledge that in order to generate the DC pensions people want in retirement, two things need to change,” he said. “They are going to need to save more, and their savings are going to need to be invested more for growth than they currently are.”
Taylor claimed private equity and venture capital have historically produced the highest median returns on average when comparing UK private asset classes.
The BBB’s venture capital financial returns report last year found that UK private equity and VC funds demonstrated the strongest performance across 2002 to 2018. The median total value to paid in capital of private equity at 1.78 and venture capital at 1.67 respectively, was higher than other classes.
But the biggest challenge in encouraging investment in start-ups would be in persuading the savers themselves, something Taylor claimed could be made very simple. “Of course, they're concerned about their own retirement income.”
“I am sure they will also want to know that the way their money is invested will support the economy and companies from which their children and grandchildren will benefit in future, through employment and growth.
He added that the companies he mentioned were developing ground-breaking new treatments for cancer and long-term illnesses. “They are creating a greener world. They are solving the latest cyber security concerns as we move towards an ever more digital future.”
"We have to get over the idea that people think of their pension
as something that's 40 years down the line."
“We're at a fork in the road with the appetite and commercial capability to create this next generation economy and to benefit from it, we need a proportionate, prudent and definite rebalancing of portfolios to include more growth-orientated return, generating equity assets, and in the UK, we have an opportunity rich environment to do exactly that we are really are sitting on a gold mine,” he said. “We need to get excited about what they are doing with their money.”
Taylor’s last point was the changes needed to do this – and whether it would with differing national mindsets. “We need a big cultural change in the UK,” he said. “If you go to the US and you go to a barbecue, you'll talk baseball for a while, but then you'll talk about what's in your 401k [a US pension] in Australia. You'll talk Aussie Rules, and then it'll be what's in your super [Australian pension]. Here, we'll talk about football, and then we'll talk about our house price, which is not a productive asset.”
“We have to get over the idea that people think of their pension as something that's 40 years down the line, and you don't need to think about,” he said. “It's your wealth accumulation plan, and you should be focused on it.”
