Tuesday 11 May 2021 6:00 am

We must open up venture capital investment to pension funds to deliver for British savers

James Wise is a partner at Balderton Capital

Darktrace’s IPO was a relief to investors and founders considering a float on the London market, doing much to take away the bitter aftertaste left by Deliveroo’s lacklustre debut at the start of April.

Yet even this very British success story, founded by expert mathematicians in Cambridge and invested in by some of the UK’s leading venture capital funds is a miss for British savers and pensioners. That’s because the investment restrictions on pension funds preclude them from benefiting from the UK’s tech boom. Fixing this is essential to enabling Britain to reap the full benefits of our high-tech economy.

British pension funds are restricted from investing into venture capital, the main way highly innovative, but also highly risky companies, get funding.

British-based venture firms are riding high at the moment. A recent report from TechNation, a Government-backed research group, showed that while much of the UK’s economy may have had a torrid year due to Covid, Britain attracted almost £11bn of venture capital investment in 2020, a new record. That’s more than every other country except China and the United States, and 250 per cent more than the EU’s largest economy, Germany.

In itself, this isn’t too surprising. Every business from the local chippy to our biggest manufacturers have moved online and British tech firms were fast to adapt to this new world. Hopin, an online events platform founded by a former Manchester University student, is now one of the fastest-growing software companies ever, reaching a £4.85bn valuation despite being founded just two years ago. And the UK fintech sector continues to lead the world, with the latest unicorn, the London-based online insurance platform Zego, attracting $150m in new funding from international firms last week.

However, a study by the British venture capital association has shown that just 3.7 per cent of all the money invested into the tech industry came from UK pension funds, while a whopping 36.5 per cent of the money came from international pension funds. As a result, Canadian or American savers are able to make ten times the return on the UK’s tech successes than our own pensioners at home.

And the UK is losing out on more than just money. As venture capital firms have decade-long investment cycles, rather than the daily attention spans of stock traders or hedge funds, it means they are a good way to fund highly innovative, but initially unprofitable technology companies in emerging sectors such as quantum computing or hydrogen fuel cells. Without more capital to fund these risky, difficult but hugely important innovations, the UK could struggle to keep up with our international peers.

The regulatory barriers limiting the choice pension funds have in the types of funds were initially put in place to protect them. Fee caps in particular, which limit the amount a hedge fund or other money-manager can charge to manage a pension fund’s capital have saved these prudent savers from being ripped off by financial-sharks. However trading a share of BT is not the same as helping build a technology business for a decade, and so making sure fees can be adjusted depending on the type of work being done would make a big difference.

The Chancellor has recognised this challenge, and made commitments to change these rules in his budget announcements. But there have already been multiple reviews in the last decade and the industry is still waiting on change.

Government funds for our technological chops are important. However, we will need a lot more capital than that to take on huge and decade-long technical challenges like climate change.

Allowing British savers to invest even a tiny portion of the almost £1 trillion in defined contribution pension funds, and letting them share in the financial upside of Britain’s top inventors and entrepreneurs, is an obvious place to start.

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