Getting more UK pension funds to invest in venture capital has proven far from straightforward, with both sides having noble, but different goals.
On one side, the pension fund industry wants to keep the cost of pension funds down. That is why we have a 0.75% fee cap (in practice averages are 0.46%). On the other side, the venture capital industry looks to the US, where pension funds contribute almost two-thirds of the capital in the much larger VC market (it’s just 12% in the UK), supporting the growth of the world’s most innovative companies. Sadly, the VC model two and twenty fee structure doesn't fit with the cap.
As Sam Dumitriu writes on our blog, the Government is looking to loosen the 0.75% ceiling on annual management fees for workers auto-enrolled into workplace pensions. It is something we have both argued for before. For example, in City AM I called for the cap to be scrapped: “It’s the law of unintended consequences that a seemingly sensible, minor regulation on fund charges is having such a significant impact. It’s not just investors who would benefit from a pension industry more open to venture capital: British businesses up and down the country would gain from this fresh source of capital.”
That said, I suggest reading the Pensions and Lifetime Savings Association’s submission to the Chancellor’s consultation on why they worry about getting rid of the cap.
In reality, compromise is probably the only way forward. Nest, who manages autoenrollment pensions, intends to allocate 5% of its funds to private equity. However, Mark Fawcett, Nest’s chief investment officer, believes that private equity will accept a deal where they pay lower fees in return for a large guaranteed stream of capital, saying “we won’t pay two and 20.”
Let’s hope for the sake of entrepreneurs that the two industries can meet somewhere in the middle. As Sam argues: “Soon, there will be £1tn worth of assets under management in defined contribution (DC) pensions. If just 3% of that was allocated to venture capital then that would be £30bn. This would have a transformative impact on the UK’s startup ecosystem.”
Sharing’s caring
We’re going to launch a new theme as part of the APPG for Entrepreneurship on ‘The Sharing Economy’.
We’re aiming to host the first roundtable next month, so please get in touch if you’re an entrepreneur, politician, academic, policy wonk etc with an interest in this policy area. As with all our APPG themes, this will include a virtual roundtable, call for evidence, briefing paper, then roundtable launch.
Next month we’ll be hosting the AGM. It will be a chance for interested MPs and Peers to become Officers of the group. Any MPs or Peers who want to get involved should get in touch with Katrina to find out more. Also, feel free to pass this on to any MPs and Peers you think should get involved.
Spooking you
The National Cyber Security Centre (NCSC) has asked us to share their resources with you. The NCSC is a government organisation that provides advice and support for the public and private sector in how to avoid computer security threats. It was set up in 2016 with the aim of making the UK the safest place to live and work online.
Cyber security is a policy area we’ve yet to really get our teeth into, but I remember coming away from one our Mishcon de Reya Leap breakfasts a few years ago in shock at the scope of the threat. It was led by one of the founders of Darktrace, whose successful IPO today is perhaps also testament to the challenge all entrepreneurs face.
Government is well aware of the threat (hence the NCSC) – new cyber security laws, for example, will ban insecure default passwords.
The NCSC has some great resources. For starters, check out their Cyber Essentials, create a Cyber Action Plan and sign up for their newsletter.
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