The UK’s £10bn science and technology investment ecosystem stands at an inflection point.
Companies that a decade ago were yet to make their first sale have grown into fully commercial businesses with thousands of employees and customers around the world.
Venture capital, much of it provided by specialist funds with deep levels of expertise, has buoyed the market. The pipeline of research and entrepreneurial talent from Britain’s universities is the envy of the world and the policy environment is more supportive than it has ever been.
From this fertile landscape has emerged a generation of businesses with the potential to lead the world for decades to come. These companies, in fields such as artificial intelligence, quantum and advanced therapeutics, are primed for institutional capital to help them scale up and reach their global potential within the UK.
In this context, news of a new agreement between the government and the pensions industry, known as the Mansion House Accord, is a hugely positive step.
The decision to allocate 10% of funds to private assets in the UK will help some of the UK’s brightest science and technology companies take the next step in their scaling journey and, crucially, offer the potential for strong returns to pension scheme holders.
Now is the right time for a step change: the investable companies are there, the fund structures to provide an appropriate risk/return for pension funds are there and fund managers have begun a collaborative dialogue that is already producing regulatory innovation.
The UK venture capital industry has witnessed significant progress in incorporating pension investments into the private capital ecosystem over recent years.
Welcome initiatives such as the first Mansion House agreement and the BVCA’s ‘VC and growth Investment Compact’ have laid an important foundation. The political will to allow pension funds to benefit from the value creation in private businesses is there.
A decade ago, Britain’s VC investment market was valued at £4bn, with about 25% of those funds invested in deep tech and life sciences, two areas where the UK is truly an innovation powerhouse.
Today, the VC market is worth £17bn, according to Pitchbook data, with nearly 60%, or £10bn, invested in deep tech and life sciences.
It adds up to a generational opportunity for pension funds to invest. Unlike the US, where hundreds of investors bid over the same deal, genuine opportunities exist to back world-class companies while they are still developing. This investor-friendly market represents a win-win for VCs and pension funds, with attractive valuations helping to create higher returns.
There has historically been an understandable reluctance among pension funds to invest in areas such as early-stage deep technology and life sciences companies, either directly or more often through VC funds. The risk profile associated with individual companies, investment time frame and a lack of familiarity with the underlying technologies have been justifiable concerns.
So too have operational factors such as the effective integration of performance fees and the development of dedicated internal private capital teams. But significant progress has been made on all fronts as the UK ecosystem has developed. Experience, knowledge and success has raised standards across the industry.
However, an allocation to high-growth technology companies as part of a balanced portfolio can provide valuable diversification and enhanced returns for pension schemes. US pension funds have benefitted from outsized returns through this strategy and the UK is now in a position to access this opportunity.
The maturation of the UK’s science and technology ecosystem and the emergence of genuinely commercial companies such as Riverlane, which is building technology that helps quantum computers make fewer errors, and Pragmatic, a semiconductor manufacturer, makes the sector a much more natural home for pension funds to invest.
These are now businesses with scale, revenue, products, and customers. We used to talk about creating unicorns, or businesses valued at more than $1bn. All the talk today in investment circles is about decacorns, which are valued at $10bn or more. In the UK, we have multiple decacorn prospects.
These companies do not stand on the brink of global success through chance. They are products of Britain’s heritage of scientific discovery. Four of our universities are in the global top 10, while Cambridge is ranked the number one global innovation cluster by per capita intensity.
This environment is decades, if not centuries, in the making. What has changed in recent years is the realisation that commercialisation of that fundamental science and technology can lead to huge economic growth. This has translated into improved collaboration between government and the pensions and VC industries to create a regulatory system that looks like it could work for all parties.
From a policy perspective, there are several areas where further progress is essential. For example, regulatory frameworks must catch up with market realities. The call for the Financial Conduct Authority to update its current guidelines is a necessity if DC pension schemes are to gain greater access to venture and growth capital funds.
Yet the focus must go beyond checking boxes to making strategic decisions that ensure pension investments contribute meaningfully to the high-growth areas of our economy and achieve strong returns for scheme holders.
Experience shows that cross-industry collaboration is crucial. The dialogue between regulators, pension funds, private capital investors and advisory bodies enables us to address issues such as liquidity expectations and risk pooling for workplace pensions.
These discussions will continue with the goals of highlighting the opportunities and allaying any concerns. It really is a win-win situation for UK companies, VC funds and pension schemes.
Dr Andrew Williamson is managing partner at Cambridge Innovation Capital
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