Last week the British Business Bank, in partnership with Oliver Wyman, released it’s ‘The Future of Defined Contribution Pensions Report: enabling access to venture capital and growth equity’. Tom Hopkins, of Parkwalk, reviews the key findings and explains why EIS and VCT can help fill the void in the meantime.
Background
As I wrote about earlier this year in the last budget the government announced a review into how defined contribution schemes could invest into venture capital.
I concluded that it was ‘fantastic that venture and patient capital is at the forefront of the UK strategy and let’s hope the asset class moves further to the mainstream to help realise UK Plc ambitions.’
The report shows that plans have not been put off by recent events, as i feared in my follow up article, and, indeed, seem to have been accelerated.
Key findings
The overriding message in the report is that a lack of investment in UK’s fast growing, innovative companies by defined contribution pension schemes means retirement savers missing out on higher returns.
The report highlighted the attractions of investing in the asset class.
- VC and growth equity (VC / GE’) exposure would add 7-12% to a 22-year-old saver’s pension pot if they allocated 5% per annum into VC / GE investments
- VC / GE has produced on average 7% per annum more return than listed equities, coming in at 18% return per year after fees
- VC / GE tend to invest in technology businesses which have a low correlation to the listed markets
- VC / GE exposure results in portfolio diversification especially given more successful VC / GE backed businesses are staying private
Sounds good and simple but the report goes on to highlight the difficulty of assessing this asset class for defined contribution pension schemes.
Liquidity issues, as recently highlighted, and VC fund fee structures are two of the main issues in creating a vehicle for pension funds to invest in VC / GE.
Various options are highlighted in the report but needless to say it is going to take a while for a solution to help the 22-year old…”saver address their pension deficit.
So, in the meantime, how does a retail investor gain access to the UK’s fast growing, innovative private companies?
EIS funds and VCTs are one option, although granted not neccessarily appropriate to to the average 22-year-old saver.
But for appropriate clients, post recent rule changes, all EIS and VCT funds are investing into growth businesses, and are aiding the UK’s ‘fourth industrial revolution’.
Not just financial returns
Interestingly the British Business Bank pension report also highlighted that defined contribution pension scheme were struggling to address environmental, social and governance (“ESG”) and impact objectives.
This area is often a neglected part of EIS and VCT investing and maybe should be part of the client conversation.
For instance, Parkwalk’s focus on cutting edge technology that has been developed within UK universities and research institutions certainly results in global positive impact.
Through the businesses that we back and build, we aim to address some of the world’s most pressing challenges in areas such as disease prevention and mitigation, the transition to a less carbon intense energy world and in productivity improvement.
Our approach therefore has knock on consideration to ESG factors and their impact, with our portfolio currently influencing all of the 17 Sustainable Development Goals (“SDGs”), created by the UN.
Accessing financial returns
And as the stats above highlight, if you select the right fund manager, the EIS and VCT sector can produce attractive financial returns, providing a useful growth kicker to a portfolio in a tax wrapper.
Legal & General, who were one of the firms who contributed to the report, noted that VC / GE returns are currently reserved to a small group of investors.
Nigel Wilson the CEO, commenting: “The UK has some of the best universities in the world, which are fuelling innovative, commercial ideas including AI and data-driven businesses as well as scientific breakthroughs. However, the innovative companies at the forefront of this disruption are now staying private for longer, delivering returns to a small group of private market investors.”
As the UK’s most active investor into university spinouts over the last 5 years and most active UK AI investor since 2011 it is great to hear the likes of L&G realising the potential of backing this area of the market.
Likewise the Prime Minister is keen to support the sector, this week announcing a new fund to help science companies scale, and stating that ““The UK has the best universities in the world and we have a proud history of scientific discovery from penicillin to sequencing the human genome. But too often we let another country commercialise this discovery. Today I am changing that.”
Exciting times for VC managers, particularly those focused on university spin outs, but also hopefully soon your average 22-year-old saver.
