Tom Hopkins: Maintaining patience on capital

The modern industrial strategy launched back in 2017 has put innovation - and, in particular, university spin-out research and development (R&D) - at the forefront of positioning the UK in the wake of Brexit and beyond.

And the government has done a good job redirecting capital to support its strategy - for instance, the rule changes regarding the Enterprise Investment Scheme (EIS) and venture capital trusts (VCTs) that were announced after the ‘patient capital review' in 2017 has resulted in more funds backing early-stage businesses.

Even so, the policymakers understand the need for the larger chunks of capital into the venture capital sector to enable the successes to compete on the global stage. And they recognise that, while the £2.5bn allocated to British Patient Capital, part of British Business Bank, over 10 years is a start, a significant portion of this capital will be a like-for-like replacement for funds previously invested into UK venture/patient capital by the European Investment Fund, which - for obvious reasons - is turning off its UK taps.

That explains the announcement in the last Budget regarding a review into ways to enable investors to direct a portion of their pension pots into venture/patient capital. And the recent illiquid investment question marks should not cloud judgement regarding the need to support this area of the economy. It is just a question of getting the investment vehicle correct. 

A recent report by the UCL Commission for Mission-Oriented Innovation and Industrial Strategy highlighted the need for government to think about Britain's industrial strategy from the perspective of purpose, and in particular around "solving grand challenges and stimulating technology development".

The report argues this mission-oriented approach provides the ‘why' for the private investment that is required to work alongside public investments to help fuel UK growth. But it also highlights that the structure of the financial system is key to the successful implementation of the government's mission-oriented policy.

"This is because finance and funding are not neutral," the report explains. "The type of finance available can affect both where investments are made and the type of activity that is funded." As such, the UK's financial ecosystem needs a rethink to help "foster a greater emphasis on the provision of long-term, patient finance for investment in innovative firms".

And while the UK is a world leader in areas such as university R&D, with four of the top 10 universities in the world now based in the country, it is competing against countries where the level of patient capital is that much greater.

There is no point in increasing university R&D spending to 2.4% of GDP - which is the government's target by 2027 (currently it is around £5.5bn a year) - if there is no funding available to create world-beating companies. What is more, following various initiatives over the last 10 years addressing the early-stage gap, the equity gap in the UK is now at the later stage of the process.

The UCL report highlights how the UK needs to have the "ability to provide the large-scale venture capital needed to achieve market-creating innovation, particularly in areas such as deep tech. In China and the US there are large deep-tech growth funds that can write cheques of €50−100m; these are lacking in the UK". The report also recommends that more public investments are needed in order to crowd in private-sector investment - but the latter will need encouragement and structure.

New solutions required

Last month, the Investment Association unveiled a proposal for a new type of investment vehicle - a so-called ‘long-term asset fund' - which would seek to avert the recent liquidity crisis. These open-ended funds would have limited liquidity windows and would be designed to encourage retail investment in private markets.

And on the back of the last Budget announcement, the authorities are looking at "a range of measures to ensure the UK's regulatory environment enables defined contribution pension schemes to invest in patient capital as part of a prudentially diverse portfolio". And then there is a review of the rules to allow further unit-linked investment into patient capital assets.

Whether the future is open-ended or closed-ended portfolios, or government-sponsored funds, the positive news is that university R&D is at the forefront of the UK's industry strategy. And let's hope the recent liquidity debate does not discourage policymakers about the importance of this asset class for UK plc.

A fund's strategy must always be clear - that is, in respect of liquid versus illiquid assets - but it will be important to get the structure right so that it works for all stakeholders: investors, regulators, government and the broader economy.

Tom Hopkins is business development director at Parkwalk Advisors

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