It’s time for a British mega-fund

 
Stephen Welton
BRITAIN-LITERATURE-PEOPLE-AUSTEN
The Conservatives’ manifesto committed to a series of UK "sovereign wealth funds" (Source: Getty)

Earlier this summer, SoftBank invested $500m in Improbable, the largest round of venture financing in British history.

The figure is transformative, it could fire the next-gen tech company into the world’s tech elite and see founders Herman Narula and Rob Whitehead enter the pantheon of Jeff Bezos, Mark Zuckerberg et al.

So why did the money come from Tokyo?

Read more: Not impossible: Virtual reality firm Improbable bags $500m in funding

The answer is simple: no British group could make such an investment. The UK growth capital market is a cottage industry. We have a strong support network for businesses looking to getting off the ground but we don’t have the large VC funds to fire these businesses into the stratosphere. We don’t have a British – or even European – equivalent to Google’s Moonshot programme but there is no reason why we can’t develop one.

BGF’s funding model has proven beyond doubt that the domestic demand for growth capital is strong. In five years, we have committed £1.25bn to around 200 of the UK’s most ambitious businesses, but this only scratches the surface.

Currently, British businesses are capped – they do not have access to the funding they need to fully scale up and reach their potential. This is not good enough. We must aim for the next unicorn to be home-grown.

Worryingly, the little funding we do have may stop sooner than we think. The European Investment Fund, which accounts for more than a third of investment in UK-based venture capital funds, is already slowing its activity in Britain and the tap could be turned off when we finally leave the EU. It is one of the many under-appreciated complexities of Brexit, similar to the recent furore around Euratom.

To fill this void, the UK needs its own SoftBank-sized mega-fund that can compete with Silicon Valley. Creating this does not require wholesale changes to the fundamentals of our economy, but it does require political will. The Conservatives’ manifesto commitment to a series of UK "sovereign wealth funds", named Future Britain Funds, is a positive first step.

We already have the ingredients: local pension funds, as unspectacular as they sound, are large groupings of UK patient capital, organised in a disparate and largely inefficient way. At the moment they lack scale. However these pots could be consolidated into one mega-fund, a "super aggregator".

This approach would not only reduce pension pots’ own administration costs and burdensome overheads but, most importantly, create a pool large enough to seriously back the most exciting British businesses. Pension pots, which are currently dormant assets, would be pulled together in a way that they could sensibly support higher risk investment strategies.

A super aggregator would unlock the enormous growth potential of capital hungry UK SMEs. It is also a model that has had enormous success elsewhere, most notably in Canada. Canadian pension funds are famed for their ambitious investments, particularly in British infrastructure, while they also help ensure that Canadian pensioners have a more comfortable retirement.

If we want the next Google or Improbable to be British-backed then we need new thinking and real ambition. At a time when we are thinking harder than ever about how to pay for old age, a pension pot super aggregator offers an innovative, forward-thinking solution to boosting UK SMEs and answering some of our economy’s trickiest questions.

Read more: Deliveroo's heading for unicorn territory with SoftBank investment talks

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles