By: Charlie Conchie
Speak with most tech and innovation figures in the UK currently and you will hear a similar gripe: institutional investors are not pulling their weight.
Investment into the UK’s tech sector, as with most of the world, has tumbled in the past year and brought into sharp relief a funding gap that they argue is driving innovative firms to greener pastures.
Pension and insurance funds, sitting on around a trillion pounds of capital, are seen by the tech industry as key to getting the innovation economy moving. Former Tory-innovation-minister-turned-venture-investor Sam Gyimah, is a man who makes that argument fervently.
“The uniquely British problem is the fact that structurally, if you look at any investment round, where the entrepreneur or the founder is raising more than £100m, it is very rare to find it being led by a British fund or institution,” he tells City A.M. in an interview.
“You have the Canadians in there, you have funds from the Middle East and you have the Americans in there, but very rarely do you have European investors, and that is a problem.”
Figures bear out a long trend of institutional conservatism in the UK. British insurance and pension funds’ holdings of UK equities have tumbled from about half of their portfolios to four per cent over the past two decades, according to data from Ondra, as reported by the Financial Times.
The holdings in unlisted firms are even more minuscule. Unlike Canadian and US pension giants which have swooped into the UK and backed early-stage tech companies via dedicated venture capital arms, UK funds have not thrown their weight behind the private markets.
Gyimah, who left politics in 2019 and says his former life is now “in the rear view mirror”, argues that there is still a mindset issue among institutional investors that needs to be addressed in order to keep firms scaling in the UK.
“In the tech space, in the life sciences space, you do see [firms going to the US] because there is a perception – quite right in many cases – that are more investors that are willing to back growth,” he says.
“I think that this is an issue that is of serious concern.”
His comments come as the City is plunged into a period of emergency introspection after a slew of firms have ditched London’s markets in the past two weeks in favour of the promised land across the Atlantic.
Cambridge chipmaker Arm revealed it would opt for a US-only listing last Friday, building supplier CRH announced a switch to New York, and data firm WANdisco said it was scoping out a US base at the beginning of this week.
Politicians and regulators have been on a drive to overhaul London’s markets to boost their appeal with a number of taskforce and regulatory reviews.
Lakestar, where Gyimah is a venture partner and specialises in advising portfolio companies on political challenges, is actively engaged in the rescue efforts. The firm has a seat at the table of the Treasury-backed Capital Markets Industry Taskforce, headed by London Stock Exchange chief Julia Hoggett, which has a mandate to boost UK capital markets from seed stage upwards.
Gyimah says progress in reform has been “very encouraging” but what is now needed is a “consolidation” of defined contribution pension plans and a way to “incentivize some of the capital to flow towards growth”.
Plans are underway – City A.M. revealed this week that talks had been held between pension fund bosses and tech figures over the creation of a £50bn pool of institutional capital that could fuel a wave of early stage tech investment.
However, as a source at the meeting told this newspaper, there was still a mindset problem they see hindering commitment to the plans.
Outside of the City, the political weight is similarly shifting in behind the efforts. Rishi Sunak unveiled plans to make the UK a “science and technology superpower” alongside a poorly received £370m public cash injection.
Gyimah says the momentum and the creation of a dedicated department for science and innovation is a welcome step, but policy needs to catch up with rhetoric.
“I’m encouraged that there is a dedicated minister around the Cabinet table, doing the job that I did before. But the real thing with ambition, is that the resources have got to match the ambition.”
He argues that the government can do more to make sure that funding of research and development is in line with the rest of the G7 and the right policy tweaks are in place.
But, he stresses, not everything is down to the government.
With all the regulatory tweaks in the world, cash is king. And in Gyimah’s eyes, as with much of the tech sector, big institutional investors still hold the key to London’s capital markets success.
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‘Pension funds need to invest in UK growth’: former innovation minister Sam Gyimah on the future of UK tech – City A.M.
By: Charlie Conchie