Will influx of pension cash keep more high-growth startups in the UK?

UK tech companies often have had to leave the country once their funding needs hit north of $30m, says Moray Wright, CEO of Parkwalk Advisors and one of the most active investors in UK university spinouts. But he, like many other UK investors, is now hoping that trend can be changed by an influx of pension fund money into the startup ecosystem, following the UK’s Mansion House Compact pension reform, launched in July 2023.

Wright says he has spent years watching companies in his portfolio struggle to compete with similar startups in the US that are 10 times or more better funded at or round the series C stage.

“The majority of investors at that stage have tended to be international or strategic/corporate, and they often invested to onshore the tech to their domicile or to acquire it,” says Wright.

UK startups in the life sciences sector in particular have tended to move to the US or wherever the bulk of their investors are located, usually meaning a connection to the UK is lost. Solexa and Kymab, former startups from the Cambridge technology ecosystem, for example, are among a number of promising biotech startups that made premature exits to foreign buyers over the past two decades.  

Unlocking pension money

The UK’s investment community’s hopes are now growing that more startups will stay in the UK and perhaps even seek to list on the country’s stock exchange after the government introduced the pension reform. The Mansion House Compact allows the UK’s largest defined contribution pension providers to allocate 5% of assets to unlisted UK equities such as venture capital and growth equity by 2030.

This could unlock up to £50bn ($65bn) of investment in private companies by 2030 if the UK’s largest defined contribution pension schemes take part.

The UK’s pension market, the largest in Europe at £2.5 trillion, is largely untapped by venture capital. So far only a tiny portion, 0.5% of defined contribution pensions, are invested in unlisted UK equities. Comparable Australian schemes invest 10 times more in private markets.  In fact, 16 times more capital from pensions around the world goes into UK private capital than from its domestic pension funds.  

The UK venture capital sector is building on the reforms by attracting UK pension funds as limited partners under its own ‘compact’, led by the British Venture Capital Association. Already pension VC funds have sprung up. This month, VC firm Future Planet Capital partnered with UK pensions solutions provider Mobius Life on a £150m spinout investment fund.

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Also in September, UK insurer Aviva moved its corporate venturing arm, Aviva Ventures, into its asset management subsidiary to deliver on the pension reform.

Investors are upbeat that the increased flow of investment will help UK startups to scale in the country. Parkwalk Advisors is talking to various pension funds about investment and collaboration in its managed funds, says Wright.

“Having the opportunity to raise much larger funding rounds will give UK deep tech companies a much more level playing field and an ability to succeed globally, creating jobs, taxes and prosperity here in the UK,” he says.

Representatives of the life sciences sector are particularly hopeful that the increased investment will encourage more startups to stay in the country. “We hope that the pensions industry can organise itself to take advantage of the opportunities that come from the fantastic spinout and scaling companies that we’ve got in life sciences,” says Steve Bates, chief executive of the UK Bioindustry Association.

Riskier investments

While pension investment will be channeled to later-stage commercially proven technologies, some argue that pension money should also be directed to more early-stage startups and spinouts.

UK university venture funds such as Northern Gritstone, which invests in spinouts from the universities of Leeds, Manchester and Sheffield, and Midlands Mindforge, a partnership of eight universities in the Midlands, could benefit from an injection of capital from pension funds.  Universities in these areas have much less access to venture capital than peers in the Golden Triangle of Oxford, Cambridge and London.

“I am optimistic that over time the Mansion House reforms will deepen pools of capital for growth assets within private markets,” says Lisa Smith, chief executive of Midlands Mindforge, an investment company raising money to invest in spinouts from its partner universities.

“As UK pension funds explore different ways to deliver against their Mansion House commitments, the emergence of university-partnered investment firms offers a rich deal pipeline of IP-backed spinouts and startups, providing significant co-investment potential across the UK,” says Smith.

Kinks in the rollout of the pension reforms are likely. It is possible that proposals to invest pension money in early-stage startups could create pushback from pension providers reluctant to invest in these riskier technologies where the company failure rate is high.

Some observers also argue that UK companies may not want to list on the country’s London Stock Exchange because of its underperformance compared with exchanges in the US such as the Nasdaq. 

“The London Stock Exchange has not been as successful as other exchanges around the world in developing an ecosystem that enables frontier technologies to get the support of a public market environment, which the Nasdaq has been particularly successful in doing,” says Bates, of the UK Bioindustry Association.

But, he adds, the increased pension investment could be the shot in the arm that the London Stock Exchange needs to make it more attractive for UK companies to go public.

“It is important that London, if it’s to be a stock exchange of the future, gets to a position where it is able to service businesses of the future rather than some of the established sectors which it has had traditional strength in,” says Bates.