In this week’s episode, Charlie Conchie talks to Digital Minister Chris Philp.
They ask whether London is still worthy of its role as a tech hub, technology and its part in addressing the cost-of-living squeeze, and free speech and online security amidst the Online Safety Bill.
Episode transcript (auto-generated)
Host 0:08 Hello and welcome to Tech weekly, a podcast by city I am where we go through some of the most important headlines in the worlds of tech crypto FinTech and beyond. I’m not and our server here is sytems. Charlie crunchy. Lily Russell Jones is away for this week’s episode but not to worry, Charlie will be talking to digital Minister Chris Philp about all things London and tech. They’ll discuss London’s prominent role on the global tech stage what technology can do to help address the current cost of living crunch and whether the online safety bill will impinge on free speech in the UK.Charlie Conchie 0:41 So we’re almost four months down now of what has been, I think, fair to say a very turbulent year one in which all sectors have been kind of rocked by the war in Ukraine, soaring inflation, and one in which the the halcyon days of 2021 do seem quite a way away. Now, we thought it would be good to stand back and reflect on where the kind of UK tech sector is, amid all this turbulence, and I’m very pleased to say that joining us to do that is digital Minister Chris Philp. So let’s sort of kick off. First of all, with this kind of status of London and the UK more broadly, as a sort of tech and fintech hub, we saw London particularly top all sorts of less for funding last year, but it’s undoubtedly become a bit more of a difficult place to do business in the past few months against that kind of backdrop of soaring inflation, and rumblings of Ukraine and so on. Are we at risk of losing that kind of tech hub at all? Do you feel? Chris Philp MP 1:26 No, I don’t think so. Let’s start off with taking a review of where we got to in 2021. Last year, because the UK generally in London as well had an amazing year. In terms of private capital raising, we saw 29 point 4 billion pounds, raised privately by UK tech companies that was comfortably the largest amount raised by any European country. In fact, it was double the second place country which was Germany, they raised about 15. And it was more than three times the country which came at third language and back and third place was France. So on about 9 billion, so an amazing year for private fundraising. When it came to public fundraising on the IPO market last year, there were I think 37 tech IPOs in London. And again, the London Stock Market was by far the most active and largest market for tech IPOs anywhere in Europe by a factor of two or three times. And if you think about you creating new unicorns, new companies that get to a billion dollar valuation, we’ve now got more unicorns than I think France, Germany, and Israel combined. And last year, we gave birth collectively if you’ve left a unicorn to 29, new unicorns, new $1 billion companies, that’s a new UK unicorn every 30 days. So amazing. 2021. Now you asked Charlie about this current year, and I think across the globe, there have been some headwinds this calendar year, the course by Russia’s barbaric invasion of Ukraine, causing a few jitters on the public markets. That’s been a global phenomenon. But actually, the London Stock market has been more resilient than others. I mean, NASDAQ over in New York and the USA is down a fair bit, whereas the footsie has been actually a lot more if you look at it over the year. So far, it’s been a lot more stable. By comparison. You mentioned inflation, again, that is a global phenomena inflation, here in the UK is about the same as the level of inflation in Europe, in major European economies like France and Germany, and it’s actually only a little bit lower than it is in in the US. So this year, I think is globally more difficult than 2021. The UK is still far ahead of its European competitors, but we’re not going to be complacent, we want to go even further and stretch our lead in Europe and make sure we’re also competing with the global leaders, China and the US as well, because being a European leader is not enough, we want to go further. Charlie Conchie 3:59 So we will look at first I suppose the the private side of things then and kind of investment into private companies. I know there’s potentially some important changes coming down that track like the pension charge cap being loosened slightly, and changes to Solvency II, which could free up cash to kind of flow into how much is government sort of pushing the industry to get on board of those, and how I suppose significant might they be to the sector? Chris Philp MP 4:22 We’re pushing very hard. As you mentioned, the two remaining kind of regulatory changes to unlock is the flow of institutional capital into UK Tech. So removing the appropriate VC carried interest from the pension charge cap is one element and then the looking at solvent which affects obviously pension funds, and looking at solvency two which obviously affects insurance companies. On the other hand, we think that is really important because our view very strongly is that the UK, financial institutional landscape, I think in particularly about pension funds and life funds is massively under allocated to tech compare Today European cousins, for example 68% of the capital which flows into us VC comes from us pension funds, big public sector systems like CalSTERS, the equivalent figure in the United Kingdom, that compares to that 68% is only 12%. There is a huge under allocation that has a number of consequences. The first is that the pension funds and other institutions are missing out on a returns opportunity, a medium term returns opportunity, which the American cousins are capturing because over the medium term over a five or 10, year period, tech, and in particular, pre IPO Tech has significantly higher returns than other asset classes, bonds, quoted lists, regular listed equities, or real estate, whatever it may be. So the missing returns opportunity, I think is also a missed opportunity for the UK ecosystem. Because obviously, if they invested in UK VC funds more, and they therefore bought bigger, it would create more of a domestic ecosystem that sits around those. But I think thirdly, it’s just a better allocation of capital for our economy as a whole. Do you think of taking a whole pile of investment money pension fund money, for example, if that’s just put into existing real estate assets are into bonds of different kinds. And in a sense, that is not necessarily oil, listed equities have large established companies, it’s not really creating a great deal of sort of new innovation, it’s not really building anything new. Whereas money put into tech, it really is building new companies building innovation, creating something which doesn’t already exist, making the economy more productive. So it’s a much in my view, both from the point of view of the pension fund as an investor, but also from the point of view of our economy as a whole, it is a much better allocation of capital, although I’m not talking about putting like off the fund into it. I’m talking about allocations of like, you know, 2% 5%, of the Aum going into going into pre IPO tech through VCs, it will improve their returns, and it will turbocharged our economy. So besides trying to remove these regulatory impediments, things like the pension fee card charge cap applying to carried interest and looking at solvency to which my colleagues in the Treasury and the regulators are doing, we also just want to talk to pension fund the community, the investor community, and just try and persuade them to take a different view to follow the example their North American cousins have been setting for for many years. Charlie Conchie 7:23 I suppose just picking up on that persuasion point there. I think, you know, the open the console Treasury open in consultation on changing these rules in January, and the response hasn’t exactly been kind of universally glowing. Why is there that mindset? Do you think that, you know, it’s a slight sort of aversion to tech from those institutional investors? Chris Philp MP 7:41 I think there’s a number of a number of factors, I mean, part of it is they do need to obviously develop a slightly different set of expertise, because investing in VC funds is obviously a bit different, or indeed, investing in tech IPOs is a bit different to more traditional forms of both debt and equity investing. So they need to build build their skill sets a little bit more, in a way in a way that, again, their North American cousins have done already. I think, secondly, we have in the UK typically had a very strong focus on like dividend yield, stability, predictability in the cash flows coming out of their investments. And that is obviously important, particularly when you’ve got short dated liabilities. But I think there is also a place in any well constructed portfolio, for a growth component growth growth investments, where you don’t get necessarily profitability straightaway, you don’t get dividend flows for that for a period of 235 years. And I think that is a trade off that I think we need to be better and more willing to make for a particular portion of the portfolio. And again, I’m talking about like 5%, or something, I’m not talking about half of it. And I think that is a that is a an allocation decision, and a trade off growth versus dividends as our potential versus stability. And that we have not the community has not the investment community has not in my view embraced as much as he could have done. So I think there’s some a bit of recalibration is required there. And if you look at the way the NASDAQ has grown in the last 20 years, and some of these companies have grown, it is a phenomenal returns opportunity that we have essentially fails to fully capture in the UK investment community. And that’s a shame we can change. Charlie Conchie 9:21 Yes. So on that sort of NASDAQ comparison there. If we look at the public markets, I think, you know, something that’s come under a lot of scrutiny in the past few months is the fact that the UK does seem to be losing a lot of these kind of most exciting tech businesses to New York and arm being a sort of one example perhaps looking towards New York to flow. Why is it that you think that some some of Britain’s best tech businesses are sort of snubbing London? Chris Philp MP 9:44 Well, I wouldn’t put it quite that way. And we have 37 tech IPOs. In London last year, we had some fantastic businesses listing here, for example, a dog trace wise Oxford Nanopore, and many others besides them, so a lot of our companies are listing here, some of the ones that went overseas We’re using SPAC. So for example, Cassie went to New York and a SPAC I think, benevolent AI went to Amsterdam and spag, we’ve now changed our stack rules. I think it was late last year, or autumn last year. To make them more flexible. We saw our first spark hammer perks list in December, I think it’d be more this year. So that sort of as it were leakage from the UK to other markets, I don’t think will happen so much in the future. I think there is a lot of misconception about the London market. So I was talking to Gordon Seung erros, the chief executive and founder of Oxford Nanopore, who floated in London in October, he was early October last year with a market cap of around about four or 5 billion Sterling. And he said he was advised by his investment bankers to list on NASDAQ not on the London Stock Exchange. He observed in passing that these banks get almost double the fees for a new listing. So their advice may not be wholly impartial. But he’s he was advised not to do it. And he was given a bunch of reasons, valuation liquidity depth of analyst coverage, and but he decided to ignore the advice of those investment bankers analyst in London anyway. And he said that he found that actually the concerns they had articulated didn’t crystallise in reality he got the valuation that he wanted. The liquidity in the aftermarket was the global liquidity on on issue on IPO, and in the aftermarket, was, was fine. And although analysts coverage provisions were better in the US at the moment, we hope that can change, it was good enough to facilitate his listing here. So I think experiences like Hizam that are Darktrace who have had a really successful UK IPOs shows it can be done an arm of said part you mentioned arm arm have said publicly that they are looking at both options. And I think there is a really strong case for arm to list. In London, obviously they’re thinking about that themselves. So, you know, we’re addressing, we have addressed a number of the technical impediments to London listing. Already, the free float requirement has dropped from 25% to 10%, you can do your listings. Now, I will share class rather sorry, you’ll share classes. And I know that there’s some consultation going on about forward looking statements in prospectuses. So all of that technical work. And I mentioned the spec changes, all of that stuff has happened. So I think there is there is no reason at all, for a UK tech firm or did any tech firm to list anywhere other than in London. And those case studies show how successful tech listings here has been in the recent past. Charlie Conchie 12:29 I suppose looking back at UK Tech as well. And we’re obviously in the midst of a kind of cost of living crunch and the soaring energy prices. What role do you think Tech has to play in addressing some of those those issues? Chris Philp MP 12:39 I think still a massive role to play. Because if you think about what tech innovation and the adoption of tech across the economy does is it basically boosts productivity, right. That’s what technical technological innovation does, which means that for the same amount of input, like number of hours works, or however you want to measure it, or amount of capital deployed, you get more output. And if you get more output that has a deflationary effects, right, produce more output with the same input, it’ll it’ll reduce aggregate prices. So I think Tech has a fundamental role to play in addressing the cost of living challenges. Addressing the UK is long term productivity challenges, it’s going to help us make a transition from a an economy that’s relied on large scale, low skill, low paid immigration to an economy that is more high skilled, high paid in terms of his labour force, and its immigration policy. It will also I think, drive economic growth, it’ll drive prosperity in general. To do that, it needs two things. Firstly, we need to have a really vibrant innovation economy investing at a university level good research. So we’re increasing our university r&d budget from 50 billion a year up to I think it’s going to be 22 billion pounds a year, over the next three or four years, we’re going to I think the chancellor is going to be looking at r&d tax credits, and making them wider and more generous in the budget in the autumn. We’re looking to stimulate private sector investment, I’ve mentioned the the work we’re going to do with pension funds to get more investment into the UK Tech. And we’re also looking to boost skills as well. So that’s the innovation side that innovation is critical, but we need it to be adopted through the economy as widely as possible. So there are steps we’re taking just to encourage or government and businesses big and small, up and down the country to embrace tech, you know, even more than they’re doing at the moment to increase their their productivity. So I think that we’ve done the Prime Minister shares his view, we see tech innovation and adoption as as the absolutely fundamental foundational to our future economic success. So we’re that’s why we’re so focused on it as a as a government. It is literally the future of the economic future of the country. Charlie Conchie 14:46 If we just sort of zoom out from UK Tech for a minute and sort of look at the big tech news of the week as well, which is obviously Elon Musk’s acquisition of Twitter. And I know obviously the online safety bill is something that you’ve been working on closely. Is government concerned about the sort of impact occasions of that acquisition and how it’s kind of absolute as free speech to grow him seems to sort of run counter to the bill. Chris Philp MP 15:07 Well, we’re not concerned because, you know, we believe in free markets. And if Elon Musk has put together his package to purchase, Twitter and the board have accepted it and shareholders consent, they’re obviously, you know, free to free to do that. So, you know, we have no, no objection there. In terms of the comment you made about sort of the the balance between free speech and protection, I mean, that really is exactly what the online harms, or the online safety bill is seeking to do. It is, it’ll be legally binding. So it’ll it’ll regardless of what Elon Musk’s personal views will be Twitter and other platforms like it, Snapchat, Instagram, Facebook, and everything else, tick tock will have to abide by the terms. In the online safety bill. We let it set out very clearly what we in government and hopefully endorsed by Parliament, think about that. It’s saying things like, Matt, the content that is illegal should be prevented from being online content that is harmful to children should be prevented as well. And that a consistent and transparent approach is required to content that is potential that is legal, but potentially harmful to adults. We’re not, by the way, seeking to censor that or mandating that it must be taken down because that would be an affront to free speech. But we are requiring transparency and consistency in the way the largest platforms approach it. So Elon Musk and Twitter will have to abide by that just the same as just the same as any other platform mill. So Danny and Enbridge, that’s why the bill is necessary. So it’s parliament that makes these calls, not individuals who, you know, may be very successful and got every respect that Elon Musk, but he should be Parliament strikes that balance, not not powerful individuals. Charlie Conchie 16:47 So it does sound like there would be a bit of a conflict there. If there was, you know, this absolutist free speech, there is still going to be a need to police these platforms. Chris Philp MP 16:54 Yeah, absolutely. And I’m going to be the regulator that does that. I mean, if, for example, an absolutist interpretation of free speech included the rights to you know, commit criminal offences, like for example, inciting terrorism, or inciting racial hatred. Parliament has said, just like those two examples, those things are illegal. It’s illegal to incite racial hatred, it’s illegal to incite acts of terrorism. Right. So and that trumps consideration of free speech, right, because Parliament said it’s illegal, therefore, it shouldn’t happen. And anyone that does, it is open to prosecution, and the platform shouldn’t carry that content. So the bill will will enforce that and Ofcom will have powers to find these large platforms up to 10% of their global revenue, which is typically in the region of 100% of their annual UK revenue. Depending on how big the UK market is important. There’s a really powerful enforcement power for Ofcom to make sure that they do comply. Host 17:52 That was digital Minister Chris Philp and that’s all we have time for this week. We’ve enjoyed and we’ll see you soon.