When Rachel Reeves unveiled the second Mansion House Accord last month, she was launching more than just a policy. She was presenting asset owners, investors and end customers with a vision for the future of UK investment.
Delivery of this vision will require the entire industry to pull together. Depressingly, nearly two years after the first Mansion House, signatories to the compact hold less than 1% of the total value of their funds in venture capital.
To achieve the government’s ambitions, pension funds need the support of the private sector, and venture capital firms have a clear role to play in giving the pension industry the knowledge and the platform to confidently make their allocation decisions.
The government and regulators must work closely with the pension industry to overcome barriers and facilitate the flow of capital into productive assets.
Much has been made of the government’s ability to compel pension funds to invest in British growth companies. I doubt this lever will ever be pulled, because the industry should see the opportunity before it.
However, mandating allocation may be the only way to deliver an improvement in the short term if pension fund capital can break through the morass of advisors, committees, regulations and collective decision-making required to unlock investment in British productive capital.
Such a move by the government would solve two problems: inertia and operational challenges.
The UK’s biggest pension schemes believe in the investment case for VC. I’ve spoken with several local government pension scheme (LGPS) pools over the past month that collectively manage £260bn.
In many instances, they’re more confident about it than public markets. But for big asset managers with pension fund clients, it remains easier to follow the public market, where they have scale, rather than risk directing flows to venture where they have far less experience or resource.
As a result of this inertia, the majority of pension fund investment into VC has come from non-UK investors over the past two years. Put bluntly, this means that trustees overseeing pension schemes in the US and Australia think buying British high-growth companies for their pensioners is good, but UK trustees do not.
Our duty is to get the best return for our clients, and venture has a role to play. Some argue that pension schemes view venture as risky and not in their fiduciary interest.
Yet, VC offers higher returns. BVCA figures confirm that over a 10-year horizon, UK venture funds achieved 11% annualised IRR, compared to only 5.3% for FTSE AllShare‑ and 7.5% for MSCI Europe. Moreover, trustees must consider the society pensioners retire into, thereby making investments in the UK economy even more important. In 2023, over 8,000 UK businesses were backed by VC firms.
Importantly, venture capital is not limited to London-centric projects. We already know that pension funds, especially LGPSs, are supportive of place-based investing – to channel funds to specific locations to deliver both financial returns and positive societal impact.
By investing in high-growth businesses across the UK, pension funds help foster innovation and economic development outside the capital. This decentralisation of investment drives prosperity in regional hubs, ensuring that economic growth is inclusive and distributed nationwide.
Pension funds, with their long-term investment horizon, are uniquely suited to support the early-stage investments that VC firms drive. Currently, pension funds are invested in UK debt. However, they could invest in AI or advanced analytics to solve drug discovery.
That’s real fiduciary duty as it means British pension funds are investing in companies that are solving problems.
It is also a meaningful way to scale up the real economy by getting capital into British high-growth businesses, investing in the real economy throughout the whole economy.
It’s for this precise reason that we have launched the British Co-Investment Fund. It was created in direct response to the original Mansion House announcement and have already won investment mandates from LGPSs, who see the benefits of taking this approach.
Through collaboration between VC firms, pension funds, and the UK government, we can drive the UK forward into a future of global leadership, sustainable investment, and transformative business growth.
Douglas Hansen-Luke is the founder and executive chairman of Future Planet Capital.
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