Michael Moore’s Outlook on the potential of new capital for the industry

What was once only true of London buses, has just happened in the UK’s private capital industry. You wait ages for a breakthrough, which could deliver a new source of capital to power the industry’s investment and returns, and then two come along at once (or what seems like it in the world of government-sponsored investment initiatives).

Back in July venture capital and private equity firms enthusiastically welcomed the ‘Mansion House Compact’, when nine UK pensions institutions made a commitment to allocate 5% of their default AUM to ‘unquoted equities’ by 2030. And now there is the ‘Venture Capital Investment Compact’, signed in October under the watchful eyes of a UK Treasury minister, by 20 venture capital and growth equity firms, with more to join in the months ahead.

As I noted back in August, there has long been a disparity between the amount of capital invested in the UK’s private equity and venture capital funds by UK pension firms compared to their international peers. In 2022, approximately £10bn of the capital raised by BVCA members was sourced from US pension funds, roughly equivalent to the total raised from all UK sources. A different metric, underscoring this point, shows that international pension schemes collectively allocated 16 times more to UK private equity and venture capital funds last year than UK pension schemes did.

So this is now officially ‘a big moment’. The UK Chancellor, Jeremy Hunt, described the industry’s new Compact as a ‘huge win’. Addressing a pensions summit at the Mansion House in the heart of the City of London, he exhorted the gathering of leaders from the pensions and private capital industries to collaborate to enable ‘defined contribution’ pension cash to be deployed into the economy to drive innovation, enhance productivity and deliver improved returns.

We can take a hint. A day later we held the first informal meeting with the pensions industry to consider what needs to happen. I will spare you the detail here, but with expectations set, we are cracking on with the work. Our exam question is ‘to produce effective investment structures to suit [pension investors’] needs to allow allocations to funds in the interest of savers’ (to quote the Compact).

Working together we will look at our well-established UK limited partnership structures, existing pension industry investment platforms, what works in places like Australia and North America, the new pension-friendly vehicles being developed by institutions like the British Business Bank – and much else. Understanding what we have, what could be adapted or what needs to be devised afresh are all potentially important elements of the project.

Clarity of focus matters - pensions beneficiaries are rightly the priority here, as they are for the countless international institutional investors who put capital to work in UK funds already. Delivering returns, and diversification, through well-regulated fund vehicles is key. Welcoming more UK institutions to be part of the mission is an exciting prospect.

But there is a separate, complementary objective for the UK government – to deliver a meaningful (newish) pool of capital for our industry’s investment managers to deploy across the economy.

To develop UK strengths in life sciences, deep tech, AI and cleantech? Tick. To provide investment across the nations and regions of the UK? Tick. To re-wire and transform existing UK businesses to ensure they are growth-focused and globally competitive? Add a tick there as well.

This short (and far from exhaustive) list brings out another key point – venture capital investment is at the heart of the economic and societal transformation that the UK government is looking to support here, but the role of mid-market private equity, or growth equity in the language of the Compact, is baked into the efforts, too.

The imagination of policymakers has been grabbed by the power of VC to provide a competitive edge in emerging sectors of the economy. But those same politicians (of all major political parties) and officials also grasp that adapting the existing economy to the challenges of the energy transition and the disruption of AI is non-negotiable if the country is to maintain its economic competitiveness. So the Compact includes growth equity firms alongside venture capital leaders, and is all the more significant, and likely to succeed, as a result.

None of us underestimates what needs to be done to meet the challenges we have been set. But all of us see the opportunities and know that the effort will be worthwhile. We need to grab the moment - after all, when two buses arrive at once, the chances of another coming along anytime soon are pretty remote.

Michael Moore
Chief Executive, BVCA

This article was originally published on 10 November 2023 on the Private Equity News website here.