How opening up access to the UK’s pension funds can free up cash for businesses

In his third of a series of blogs, James King of venture capital firm Find Invest Grow (FIG) discusses why opening up access to pension funds as a source of VC finance would substantially increase the capital available to Britain's entrepreneurs.

Silicon Roundabout may be booming and foreign entrepreneurs flocking to the UK in search of investment and partnerships, but many British start-ups still find it hard to secure the right kind of funding. Having a good idea and turning it into a viable business is just half the work for a start-up. Much trickier – and more time-consuming – is getting the funding to make it happen. For start-ups outside the US, it is far more difficult to get the venture off the ground.

Taking a look at venture capital investment activity in Europe compared with the US reinforces this. European VC investment, as a share of GDP, is approximately just a quarter of that in the US, where in 2012, $20.6 billion of venture capital was raised. While the American economy is around six times the size of the UK’s, the UK only managed a mere 6 per cent of this amount.

For the UK to redress this balance and ultimately provide more support to its entrepreneurs and early-stage businesses, it is important to look at the sources of US VC finance.

Take pension funds. In the US, these are a far more important source of VC investment. This has in part been driven by a number of government initiatives, including the relaxation of the ‘prudent man’ rule in 1970s, allowing US funds to commit up to 15 per cent of their assets in riskier investments. 

They actually only allocate a modest 0.04 per cent of their assets to venture capital (by contrast the UK invests 0.0072 per cent) but while these percentages might seem small, the sheer scale of pension funds (in 2011 the total value of pension assets in the UK was $2,394 billion, compared with $16,080 billion in the US) make them an important source of capital. 

To put this into context, if UK funds invested the same share as the US, an extra $783.5 million would be available, providing a major source of capital available to venture capitalists and a welcome injection into the SME economy, with both the funds and the start-ups realising significant benefits. 

Pension funds could take greater advantage of high growth rates in a high-return asset class. Take the US seed accelerator Y-Combinator as an example. Recently its top 21 performers were valued at a combined $4.7 billion, not a bad return if you were in a position to invest when the company was founded only seven years ago. VC investments can also help balance portfolios by diversifying strategies to hedge against flat returns in other markets.

More money entering the venture capital industry is obviously good news for the start-ups too. An increased supply of funding would intensify competition between the VC firms meaning they would need to offer more favourable terms and conditions in order to secure the best deals. More investment would also generate more companies, create more jobs and drive much-needed innovation. This is hugely important when unemployment remains high and once billion dollar companies such as HMV are making thousands redundant.

So what needs to change to bring UK levels of investment in line with the US? Is it a regulatory issue, or an attitudinal problem that results in a risk-averse outlook from UK pension funds?

It is in fact a combination of several factors and a long-term cultural shift is required. But for now, if the government encouraged pension fund managers to take a much closer look at UK venture capital and provided a statement that pension fund managers would be considered prudent if they invested up to 15 per cent of their assets in unlisted, unquoted, further investment in Britain’s start-ups would be stimulated.

However, while this would lay the foundations for change, pension funds must also reassess the role of alternative assets in their portfolios if the UK’s new businesses are to get the support they deserve.


James King

Founder & Director of New Model Venture Capital

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