The next era of investing in innovation
The UK is a global leader in innovation, with world-renowned universities, cutting-edge industries, and a thriving venture capital market. Yet, many high-potential companies, especially in life sciences and deeptech, struggle to scale due to limited access to patient capital. In this insightful blog, Louis Taylor, CEO of the British Business Bank, explores how the Mansion House reforms and increased pension fund investments could unlock billions in domestic capital, fueling the next generation of UK innovators. He highlights the critical role of the British Business Bank in driving this shift and supporting the growth of future industry leaders.
The UK provides fertile ground for innovation to thrive. It is a bright spot for creativity, innovation and entrepreneurship. However, a lack of access to patient capital continues to hold back some UK companies from scaling up and fulfilling their commercial potential here in the UK.
We are home to three of the top 10 universities globally and rank fourth in the world in the Global Innovation Index. We are a hub for genetics and genomics insight, a frontrunner in climate tech, and a force to be reckoned with when it comes to quantum computing and nanotechnology.
The unlisted businesses driving these innovations can be the world leaders of the future. However, they require critical time spent in research and development to progress their products and ideas, and a lack of patient capital in the UK continues to hold many of them back from scaling up and fulfilling their full commercial potential. Furthermore, when they seek the more significant later-stage funding, from rounds D to F, the risk is that these cutting-edge businesses turn to the US.
Over the past decade, the UK has established itself as a globally leading VC market and has overtaken India as the third largest VC market in the world, now accounting for 6% of global investment. But there are potentially billions more in domestic investment that can truly catalyse high potential and high growth companies, and that is from UK institutional, including pension fund, capital.
The Mansion House reforms, announced in July 2023, speak to the ambition to channel long-term capital from pension funds into the UK’s growth companies which has the potential to unlock an additional £75 billion. This is mutually beneficial, and these benefits are threefold.
First, the returns: the British Business Bank’s UK Venture Capital Financial Returns report last year found that UK private equity and VC funds demonstrated the strongest performance across the 2002-2018 vintage years, with median Total Value to Paid In Capital (TVPI) of 1.78 and 1.67 respectively.
Second, the economic impact: 2023’s British Patient Capital Interim Evaluation report of the commercial subsidiary of the British Business Bank, found that economic benefits of £5.1 billion were likely to be generated by firms backed by British Patient Capital by 2030/31.
Third, the end saver: the Mansion House reforms could increase a typical earner’s pension by over £1,000 a year in retirement according to the British Business Bank’s The Future of DC Pensions report with Oliver Wyman. This is an opportunity for pension funds to embrace a new phase of growth alongside the private capital community. Starting this journey now is a chance to understand the opportunities this presents, as part of a diversified portfolio, and benefit from these evident returns as the companies grow.
As part of the Mansion House reforms, the British Business Bank was asked to explore establishing a vehicle that could receive third-party capital. That confidence is well placed. The established view is that early-stage company investing is riskier, and it is true that they require higher levels of due diligence to scrutinise as an opportunity. There will also be many that do not survive, as test and learn is a natural part of innovation. However, the ones that do survive become leaders, and therefore able to mitigate any prior loss – and then some.
As the UK’s largest domestic investor in venture and venture growth capital, and the most active later-stage investor in UK life sciences and deeptech, the British Business Bank is able to navigate these hurdles and spot the opportunities. Total commitments from British Patient Capital, including capital from other institutional investors, now total £13 billion investments since inception totalled £1.9 billion across 70 fund commitments, six co-investments, and 16 direct deals. We have invested alongside best-in-class fund managers in almost 1,200 of the most promising later-stage UK companies.
Another strong endorsement of the Bank’s 10-year track record, skills, and capabilities came when the government announced plans to establish a National Wealth Fund, with the Bank central to its delivery. This is expected to create another compelling proposition for investors that will help mobilise billions more in private investment, enabling it to catalyse external institutional capital, including pension fund investment. The aligning theme here is growth, and all that can be achieved for UK high potential companies.
At the British Business Bank, the fund we have been asked to create is in development and progressing as planned. Upon regulatory approval and when launched in 2025, investment would be drawn from our own permanent capital base as well as catalysing external institutional capital, including pension funds. The industry reaction to the Mansion House initiative has been positive, with eight pension providers, managing total assets of over £350 billion, acknowledging that such a vehicle could be a valuable addition to the market. While we can leverage our scale, network and track record with the wider VC ecosystem to take it forward, these partnerships along the way are crucial to the next phase: an era where further collaboration could catalyse greater institutional investment for the good of business, and the good of the UK economy.
