Darktrace’s IPO was a relief for investors and founders considering a float in the London market, doing a lot to remove the bitter aftertaste left by Deliveroo’s lackluster start in early April.
Yet even this very British success story, founded by expert mathematicians at Cambridge and invested by some of the UK’s leading venture capital funds, is a failure for UK savers and retirees. This is because investment restrictions on pension funds prevent them from profiting from the UK’s tech boom. Addressing this issue is essential to enable Britain to take full advantage of our high-tech economy.
British pension funds are prohibited from investing in venture capital, the main means for highly innovative but also very risky companies to obtain financing.
UK-based venture capital firms are currently on the rise. A recent report from TechNation, a government-backed research group, showed that while much of the UK economy may have had a scorching year because of Covid, Britain attracted nearly $ 11 billion pounds of venture capital investment in 2020, a new record. This is more than in all other countries except China and the United States, and 250% more than the EU’s largest economy, Germany.
In itself, this is not too surprising. All businesses, from the local chippy to our biggest manufacturers, have moved online and UK tech companies are quickly adapting to this new world. Hopin, an online events platform founded by a former University of Manchester student, is now one of the fastest growing software companies of all time, reaching a valuation of $ 4 billion. pounds sterling when it was founded just two years ago. And Britain’s fintech sector continues to dominate the world, with the latest unicorn, the London-based online insurance platform Zego, attracting $ 150 million in new funding from international companies last week.
However, a study by the UK Venture Capital Association found that only 3.7% of all money invested in the tech industry came from UK pension funds, while 36.5% of the money came from international pension funds. As a result, Canadian or US savers are able to make ten times more profit from UK technological successes than our own retirees at home.
And the UK is losing more than money. Since venture capital firms have ten-year investment cycles, rather than the day-to-day attention of stock traders or hedge funds, this means that they are a good way to fund investments. Highly innovative, but initially unprofitable technology companies in emerging sectors such as quantum computing or hydrogen. fuel tanks. Without more capital to fund these risky, difficult but hugely important innovations, the UK could struggle to keep pace with its international peers.
Regulatory barriers limiting the choice of pension funds in fund types were initially put in place to protect them. The fee caps in particular, which limit the amount a hedge fund or other fund manager can charge to manage the capital of a pension fund, have kept these cautious savers from being scammed by financial sharks. However, trading a share of BT is not the same as helping to build a tech company for a decade, so ensuring that the fees can be adjusted for the type of work being done would make a big difference. .
The Chancellor recognized this challenge and pledged to change these rules in his budget announcements. But there have already been several reviews over the past decade and the industry is still waiting for changes.
Government funds for our tech chops are significant. However, we’re going to need a lot more capital than that to tackle huge decade-long technical challenges like climate change.
Allowing UK savers to invest even a tiny fraction of the nearly £ 1 trillion in defined contribution pension funds, and allowing them to share the financial advantage of leading UK inventors and entrepreneurs, is an obvious starting point.