Despite a big push from the government to encourage greater pension investment into UK alternatives, there seems to be little initial activity from pension funds in relation to venture capital investing, as Jon Yarker reports.
The government has been on a campaign to encourage pension schemes to invest more in UK ‘growth assets’, with the Mansion House Accord earlier this year bringing together major defined contribution (DC) providers that pledged to allocate at least 10% into such assets by 2030.
Venture capital forms an important part of the government’s ambition. In June, chancellor Rachel Reeves announced the expansion of the British Business Bank’s financial capacity to £25.6bn, significantly growing its resources for supporting innovative smaller businesses.
The bank’s British Growth Partnership has attracted interest from institutions such as Aegon, NatWest Cushon, and London CIV – but what is next for this asset class?
When Pensions Expert contacted several major DC pension schemes to enquire about the progress of venture capital investment and gauge sentiment about these efforts, none were able to comment. Now Pensions, Nest, Smart Pension, and The People’s Pension – all Mansion House Accord signatories - politely declined to comment on the topic.
Smart Pension has previously announced a plan to allocate as much as £4bn to private markets over the next few years, including venture capital.
One scheme that did give a view was Railpen. The £34bn multi-employer pension scheme is supportive of the government’s plans, but head of UK productive assets Julia Diez warned against any approach being too prescriptive.
“Any ambition to invest domestically must be balanced with scheme characteristics and objectives and in line with fiduciary duty, rather than mandation,” says Diez. “The whole UK ecosystem must be considered, including UK public equity and listing rules, to ensure UK companies remain in the UK.”
Diez was recently appointed to the newly created role of head of UK productive assets, with Railpen saying she would have a “particular emphasis on UK innovation-focused investments”.
Interview: British Business Bank’s Louis Taylor
Pension funds need to rethink their historic preference for keeping fees down and embrace potentially attractive “net-of-fee” venture capital returns, British Business Bank chief executive officer Louis Taylor told Pensions Expert last year. Read the full interview.
Strengthening the investment case
The logic for UK venture capital investment is clear as pension schemes seek investment growth, but industry experts say more can be done to encourage allocations.
Helyne Slade, director and head of DC investment at Isio, said such assets need to withstand independent scrutiny to be truly attractive for pension funds.
“If the investment case is compelling, capital will flow into the market.”
Helyne Slade, Isio
“While the UK market has produced reasonable average returns historically, performance of the best funds has lagged US counterparts,” says Slade. “It’s crucial the government pursues policies which encourage and support the best entrepreneurs in founding and scaling businesses in the UK. If the investment case is compelling, capital will flow into the market.”
The consensus seems to be that the government can do more. Alison Leslie, partner and head of DC investment at Hymans Robertson, advocated a more “hands-on” approach to ensure pension scheme investment.
“The government has initiated a programme of outreach from letters to schemes by the pensions minister to dinners and educational forums,” says Leslie. “Consultations continue to be useful; however, the more hands-on approach of meeting smaller groups through regulators and the work of the Lord Mayor’s office is really pushing the agenda forward.”
Managing costs and accessing expertise
There are clearly still barriers for investors to overcome. Leslie highlights that alternative asset classes such as venture capital are often alien areas for trustees.
“It’ll take time for this to bed in,” she said. “A push into a riskier asset class will be the preserve of those who have the ability to understand and seek out the best opportunities.”
“Ensuring businesses have the space to thrive is crucial in retaining innovative organisations and ensuring the infrastructure they need is in place.”
John Greaves, Railpen
Railpen is working collaboratively with policymakers on the reforms needed to unlock investment in “key strategic sectors”. The pension scheme’s director of fiduciary management, John Greaves, says the UK investment ecosystem needs to be considered “holistically”.
“While unlocking funding and growth within private markets is important, ensuring businesses have the space to thrive is crucial in retaining innovative organisations and ensuring the infrastructure they need is in place,” explains Greaves. “For the proposals to work, there needs to be an adequate supply of investable assets.”
Venture capital investments bring different cost considerations. Managers need access to expertise in a diverse range of business sectors, while early-stage companies typically have a high failure rate, necessitating a large number of holdings.
Cost has increasingly coloured how schemes view investments, and private assets have been pushed to the margins as a result, according to Isio’s Slade.
“At recent discussions on the Pension Schemes Bill, the pensions minister called out that providers believe the industry has a ‘collective action problem’ by being focused exclusively on cost and not on returns,” adds Slade.
“It will take some time for employers and trustees to get comfortable that a more expensive default fund, which includes private markets, is in members’ best interests.”
