It should be a good thing that Oxford Nanopore, Deliveroo, and Cazoo are all listing, regardless of their early stock market performance. But who in particular will be celebrating? It’s not clear whether much of the value created will be seen by the person on the street – and if we really want the broader UK population to buy into the vision of the UK as a tech giant, then this needs to change.
We need to look afresh at how retail money gets sensible access to the value generated in the private markets because neither “top down” access through large institutional funds, nor “bottom up” angel investing seems to fit the bill.
Pension holders and other savers may get some access via large, institutional fund managers who dominate retail investment, but this faces two challenges.
First, many of these only buy into companies once they are public. As we know, this is happening later and later, so they miss out on a lot of the value growth which is captured by private investors. And following Deliveroo, it doesn’t look like tech companies will be looking to list any sooner in their lifecycle.
Secondly, Institutional funds trying to access private markets via venture capital funds face well-documented challenges, particularly for defined contribution pension schemes. The government is rightly looking to remove some of these barriers, but progress has been decades in the making. Those that have found ways to deploy into venture tend to do so through well-known, established funds, so they miss out on the rapidly growing emerging manager segment.
On the flip side, there is growing talk of angel investing as a means of accessing startup growth. This is really only appropriate to a few, high net worth, highly networked people.
Yes, angel investing helps you learn, builds your network and gives you valuable experience close to the coal face. But in order to use it to generate wealth, you need to be diversified across startups, that’s why early stage VCs tend to have at least 20 startups in one portfolio. Since many startups won’t accept very small investments, this means you almost certainly need to be a high net worth individual to take this on, especially if we remember that an average saver should not allocate more than perhaps 5-10 per cent of their liquid assets to this high risk part of the market.
On top of this, you often need to be well networked to “see” the best deals – the ones that investors are relying on to pay for the losers, and then some, otherwise you can end up with a basket full of poor investments. Angel investing tends to be a game where the winners are already prosperous, well-networked individuals.
So what tools does that leave us with, to increase access to private market returns? One that doesn’t get much focus is direct retail access to venture funds – a middle ground between angel investing and relying on pension fund managers to up their game. Yes, venture funds are still high risk, but they are far less risky than individual angel investments – with a single investment, they can give you exposure to a diversified set of startups.
Passion Capital recently showed that this is possible by allowing retail investors to invest small amounts in their latest VC fund, by opening up access on crowdfunding platform Seedrs. But Passion’s approach is difficult for most funds to replicate and the fact that it is a market first in an otherwise fairly mature venture ecosystem shows how much there is left to do.
In particular, we need to look at the regulatory treatment of retail investment in venture funds. An individual can invest their life savings into a single startup, with virtually no regulatory barriers whatsoever, but investing £100 into a venture fund comes with significant regulatory friction. These rules, designed for much larger and different funds, focus on the wrong risks and have largely kept VC funds closed to smaller, retail investors. Reviewing and re-writing these rules can achieve more sensible, cost-effective access for retail investors, focused on the risks that are relevant to venture.
What is the prize? More people will have access to the growth that we see in private markets, ensuring that wealth does not continue to concentrate in the hands of a small number of market insiders. This is important if the tech sector wants to take the public with it as it re-shapes almost every aspect of the way we live our lives.