The UK economy would be boosted if large corporations invested more in innovation

A number of UK based companies have this year agreed to takeover deals by foreign private equity firms this year, including EasyJet (£5.2bn by Apollo), Intertek (£10.9bn by EQT), Beazley (£8.1bn by Zurich Insurance), Schroders (£9.9bn by Nuveen) and Mitie (£3.1bn by Clayton Dubilier & Rice’s OCS subsidiary). Meanwhile UK warehouse company Segro is being pursued by US property group Prologis, which recently made a £13.5bn bid for the company.

One feature that all these businesses have in common is the lack of a corporate venture function, and this may be no coincidence. Taking the focus off innovation and growth has resulted in slower growth and left them vulnerable to takeover. The most innovative companies tend to outperform on delivering on total shareholder return, according to studies carried out by Boston Consulting Group. Without a corporate venture team keeping it at the technological forefront a business will fall behind peers.

In the past when GCV has looked a the companies joining and leaving the FTSE100 index, there has been a strong correlation with the presence of a modern innovation and venturing approach.

Therefore , we fear that BP, which has recently closed down its venture building operation, will succumb within a few years — or many even months — to a takeover by, say, an American peer. Wiping out to its successful CVC unit to focus on its core oil and gas portfolio may have saved a few million, but may ultimately cost far more in growth and performance.

The UK, too, will pay the cost. Tens of thousands of jobs will likely go as CD&R combines Mitie with OCS. The hallmark of a private equity firm takeover is this kind of cost-cutting exercise.

So, with a new Labour Prime Minister and Chancellor settling into their seats what, if anything, could be done? 

The UK has plenty of amazing innovators, startup capital and global excellence in a host of areas. Take CuspAI or Humanoid with their big raises this week that included backing from corporate investors in Germany, US and Taiwan.  As exciting as this influx of foreign capital is, it is worth asking why UK corporations are not also taking part. Why are Germany’s Bosch and Schaeffler investing in UK champions, rather than, say, Rolls-Royce or Smiths?

Recent analysis by GCV shows that the UK is significantly behind the US and Japan, for example, when it comes to domestic corporations supporting startups. A majority of startup funding rounds in the US and Japan have a domestic corporate backer, while in the UK, that figure is less than a quarter.

One strategy the UK government could take is encouraging PE firms to invest in future innovation in the companies they purchase, perhaps ringfencing some money as an investment fund. This hasn’t classically been part of the playbook. Can you name one of their portfolio companies with a long-term investment strategy? Me neither. 

Or perhaps listed companies could get tax breaks for innovation. This might encourage more innovative companies to list in the UK rather than in the US, and would halt the gradual decline of the London Stock Exchange.

Patrick Vallance, former scientific adviser to the Prime Minister encapsulated this well in 2022 when he said: “Unleash demand for corporate venturing – government should re-engage corporate investors and review measures to support corporate venturing in areas of national priority. 

“There is a significant growth opportunity for the UK to incentivise scale-up investment from corporates, including global R&D businesses based in the UK, to invest directly or as limited partners (LPs) in VC funds. To incentivise corporate R&D the UK will need to compete with USA, Israel, France, and Germany, which have introduced a range of policy packages including organising business enterprise forums, supporting co-investment initiatives, and providing fiscal incentives. The UK’s science and technology companies ready for scale-up could become some of our national crown jewels but the UK is currently underperforming in nurturing their development.” 

It is not either/or supporting existing champions of industry or science and tech startups but both. Collaboration really can be a way forward.