Two truisms has taken hold in the City of London in recent years. One is that the British stock market is moving inappropriately, having lost its risk appetite, much of its investor base and therefore its appeal to capital-starved businesses. The other is that British pension savings are being invested in the wrong things. In particular, they are not exposed to the type of risky assets that have the potential to grow to fund a reasonable retirement. Both problems suggest a common solution: push pension funds to invest more in early-stage, high-growth companies. Pensioners would get diversified portfolios with juicier results. At the same time, a number of young, ambitious companies – backed by more domestic investors – could be convinced to list in London rather than abroad.
Just such a push is going on now. On 10 July, Jeremy Hunt, the Chancellor of the Exchequer, announced the “Mansion House Compact”. The agreement commits nine major investment outfits to allocate a much larger portion of pension savings to shares of unlisted companies. Together, the group oversees two-thirds of Britain’s marked contribution (d.c) pension schemes — by far the most common type of workplace pension, with assets set to grow to £1trn ($1.3trn, or 45% of gdp) before the end of this decade. Less than 1% of such assets are currently invested in unlisted shares; the contract specifies 5% by 2030. If the rest of the industry followed suit, that could unlock up to £50bn of growth capital for early stage companies.
Will it work? Daniel Mahoney, chairman of the Biobusiness Association, a trade group for life sciences and biotechnology companies, believes it will certainly benefit his sector. He believes that growth capital is needed at around £10bn-12bn, of which “very, very little” is currently coming from British investors. Startups can attract funding from foreign investors, especially Americans, but large equity checks from such backers are the exception rather than the norm.
Innovative companies therefore have to lower their ambitions. Running drug trials is expensive, says Dr Mahoney, and “if you know you can’t raise £100m, you don’t do a business plan that needs it.” You make one that needs £25m.” If even a small portion of the growth capital needed by biotech companies could be raised domestically, that could help “crowd in” to make more foreign investment as well.
Savers, too, will benefit. Next to its peers, Britain looks like an outsider in its inability to share in the growth of private companies. Mr Hunt’s speech referred to the 5-6% of Australians d.c money invested in unregistered shares; many in town point to the odd view of Canadian pension funds being more open to high-growth British businesses than British pensioners. Even a small change to that is likely to have big benefits. An analysis carried out in 2019 by Oliver Wyman, a consultancy, and the British Business Bank estimated that a 22-year-old man allocated 5% of the d.c Venture capital assets will increase your final retirement pot by 7-12%.
That does not mean that more companies will definitely stick with the City when the time comes to enter public markets. For Kate Bingham, the venture capitalist who ran Britain’s covid-19 vaccine task force, now of St Health Investors, it is not a problem if promising companies prefer to list on America nasdaq exchange rather than at home. “That market is much deeper and more liquid than the London market, and that won’t change any time soon,” she said. Such businesses could do with more investment at a growth stage. Ms Bingham remembers being supporting a successful start-up that had to launch on the stock market a few years earlier than it should have, due to a lack of growth capital. The company is doing well, but they could have gone public in a stronger and less risky position if more domestic growth capital was available.
It is also not out of the question whether the London Stock Exchange could, finally, get a boost. Dr Mahoney describes a recent gathering of City councillors, to discuss how Britain’s capital markets can be renewed. “It was the first time I was in a room full of people not just whining about the problem in a British way, but actually putting solutions on the table,” he says. ■
