UK industry leaders highlight the need to increase scale and risk appetite but warn the venture capital ecosystem will take time to develop.
UK institutional investors need to take more risk and work collaboratively if they are to access the outsized private markets returns achieved by their international peers and support the UK economy.
Ian Brown, head of banking & investment, National Wealth Fund (NWF), said his fund has been supporting the UK’s transition to net zero but it needs greater commitment from institutional investors .
“From our perspective… I don’t think people are taking anywhere near enough risk,” said Brown. “I’ve [only] got £28 billion… The only way it works is with other people coming in alongside us.
“People are very comfortable with ‘transition assets’ but that often means already operating wind parks or solar farms. In reality, these are very rapidly becoming mainstream assets. Not a lot of risk is being taken.”
A lot of members want to have exposure to our asset class, to have that risk. You can get great returns in the UK.
Kerry Baldwin, managing partner at IQ Capital
The mandate of the NFW, formerly the UK Infrastructure Bank, has been extended from its original net-zero aim to support the government’s wider industrial strategy. “This will allow us to invest in a far broader range of sectors than we invest in today and allow us to invest in economic infrastructure,” said Brown. “It’s quite a big change.”
The NWF has so far deployed £5 billion in 46 transactions. “We look for financing problems that private markets can’t otherwise solve,” he said. “That tends to mean we’re involved in earlier stage investments… The whole purpose of what we do is to unlock transactions that otherwise wouldn’t happen, and, very importantly, crowd in others such as pension funds to amplify our capital.”
While the NWF has a clear mandate to support private markets investment, institutional investors are required to act in the interests of their members.
Fiduciary duty
Carol Young, group CEO of USS, said: “There is a strong and emerging view that private markets are a good thing for UK pension schemes, and the government has made it part of its core mission.”
She said, as a fiduciary of members’ money, she wants to understand “not just can pension schemes help the UK, not just should assets be directed to private markets because it would be good for the economy, but is it good for members?”
She added that it is still an open question of how to attract “catalytic capital” from institutional investors. “With all the different types of pension funds, with their different risk and return requirements, work is going to have to be done by the government and industry to package this up in a way that is more digestible and accessible for the schemes.”
While the USS already has a mature private markets investment programme, other schemes may be attracted by the available returns.
Kerry Baldwin, managing partner at IQ Capital, explained the potential of venture capital to produce huge returns. “I’m hunting something called a dragon… an investment that pays back the whole fund. It’s got risk, because not all assets are going to survive. That’s the job of being a very hands-on manager, mitigating all the risks across the timeline of these companies.”
She added: “We’re not saying you should put all your money into venture capital. We’re saying… a lot of members want to have exposure to our asset class, to have that risk. You can get great returns in the UK. We’ve got one of the most developed ecosystems, certainly for science and technology.”
The British Business Bank (BBB), the largest domestic investor in UK venture capital, is focused on attracting capital to the scale-up stage.
Ian Connatty, managing partner, The British Growth Partnership, BBB, said: “We’re thinking very hard about the scale-up piece. We think there’s a great cadre of startups, so how do we make more of those as they transition to scale ups? That’s where my role at BBB now focuses.”
He is now working on the British Growth Partnership, which is set to be established subject to regulatory approval. “[The aim is to] catalyse greater institutional investment into the UK’s highest potential companies.”
While the UK has become the world’s third-largest venture capital market, it can still learn lessons from its international peers.
IFM Investors, which is owned by 17 Australian pension funds and pioneered the open-ended infrastructure equity strategy, provides an example of how institutional investors can collaborate and scale up to become major private markets investors.
Former shadow pensions minister Gregg McClymont, now executive director IFM Investors, notes that the major private markets players internationally are the major DB schemes such as Texas Teachers and CalPERS in the US and Maple Tree in Canada as well as the DC super funds in Australia.
He said: “The characteristics of pension funds around the world that invest across private markets with significant diversification… are scale and fiduciary duty. They’re the two things that characterise the systems which have funds that are major private markets investors.
“They’re the major investors in the private markets, because they’re very big, and they have the expertise via scale to effectively assess opportunities.”