When it comes to investment in startups and innovative early-stage companies, the UK has a self-sufficiency issue.
Over the last decade, a shortage of funding from domestic investors – particularly for innovative tech companies at the mid to late stages – has forced many to seek overseas financial support to sustain growth.
This decline in domestic investment has been particularly marked in UK pension funds – last year, only 20% of Defined Contribution assets were invested, compared to more than 50% in 2012.
That’s why the Chancellor’s plans for £25bn pension megafunds – announced on Thursday – came as music to the ears of the UK tech and innovation sector.
Set to be finalised by 2030, the megafunds (essentially large, consolidated pension investment vehicles) have huge potential to boost the economy by supporting high growth, early stage companies, while at the same time addressing the UK’s lack of self sufficiency when it comes to its investment capabilities.
Unlocking domestic capital
Currently, many UK pension funds are small and fragmented, often investing conservatively and internationally. The Chancellor’s plans to consolidate them into larger megafunds, however, means they can be used to support businesses in fast-growing sectors like tech, life sciences and the green economy, as well as to deliver crucial national infrastructure in road and energy.
By pooling domestic pensions to invest in opportunities here in the UK, the country can become less reliant on overseas capital to fund growth.
This is vital for safeguarding the UK’s economic sovereignty. Unlocking more domestic capital would enable the UK to align its investment agenda with national priorities – for example, reaching net zero targets or regional development – and ensure that profits remain within the economy and benefit pensioners here instead of flowing overseas.
Building the base of domestic investors is also good news for the strength of the UK market, reducing dependency on IPOs or exits via US markets, and generally contributing to a more dynamic, innovation-friendly economy.
Scale enables diversity
One of the key factors behind the collapse of Silicon Valley Bank (SVB) two years ago was a lack of diversification in its investment portfolio.
It’s another strong argument for pooling pensions into megafunds. Whereas smaller pension schemes can’t spread risk widely enough to justify exposure to slightly riskier assets, megafunds provide access to a broader, more strategic asset mix – including innovative tech startups or green projects.
That means more financial support for the companies addressing the big issues of our time, more diverse assets delivering higher returns for savers, and better investment strategies overall – worth up to £6,000 to the average earner’s pension according to government estimates.
The international precedent
And while the Chancellor is keen to reduce the UK’s reliance on overseas investment, it is worth looking at the example set by other countries – particularly Canada – for a model of how to use pensions to support domestic growth.
Under the Canada Pension Plan Investment Board (CCPIB), pension contributions are pooled into a single, professionally managed fund investing in national infrastructure projects as well as venture capital funds that support high growth startups.
With assets worth more than $600bn, the CCPIB has played a pivotal role in developing some of Canada’ most innovative technology companies. These include secure AI platform Cohere, which received $75m from CCPIB’s venture capital arm Radical Ventures, and Genesis Therapeutics, a biotech company using AI for drug discovery.
Not only have investments like these strengthened Canada’s domestic innovation ecosystem, but Canada’s pensioners have seen higher returns on their savings as a result too.
Overall, it’s highly encouraging that the Chancellor has chosen to pursue this strategy. It’s clear there is international precedent for a large, independent pension megafund with a mandate to pursue long-term value to stimulate the domestic economy and support important technological innovation.
Because of their scale, expertise, and available strategic support, pension megafunds are well placed to diversify into slightly riskier capital – with the reward being an economy that is stronger, more self-sufficient and technologically advanced, with better outcomes for savers, too.
By adopting this approach and addressing a critical scaling capital need, the UK can continue to thrive as a world-leading tech ecosystem.
Russ Shaw CBE is the founder of Tech London Advocates & Global Tech Advocates
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