As part of a policy aiming to boost economic growth and innovation, the UK is expected to announce pension fund reforms that will allow these vehicles to invest in early stage firms.
Chancellor of the Exchequer Jeremy Hunt is expected to pursue a policy that will see defined contribution plans invest up to 5% of funds in younger firms. Reportedly, the plan will be revealed today at the Mansion House speech in the City of London.
While allowing these funds to invest in risky, early stage firms will introduce a new investment class to pensions, the capital infusion should drive growth and innovation in the UK – the most entrepreneurial-focused country in Europe.
Sharing a comment with CI on the plan Yoko Spirig, CEO and co-founder of Fintech scale-up Ledgy, says early-stage firms will welcome the new capital in light of recent declines in funding for these companies. She said the pension funds will need a “real mindset shift” to support these firms.
“We are in the midst of a funding crunch, so early-stage companies will welcome any new sources of capital. It’s good that the government is addressing the funding gap in the tech industry where London and the UK is still world-leading,” said Spirig. “However, it’s worth remembering that for UK companies, managing new pension fund investors may be quite different to traditional venture capital (VC) investor relations. VC investors are used to dealing with early-stage companies where the business model is higher risk.”
Spirig noted there are good examples of pension funds investing in early stage companies, pointing to the Ontario Teachers’ Pension Plan in Canada.
“While it will need a real mindset shift from UK pension funds, which right now are 70% invested in bonds, to give scaling companies and founders the support they need, it’s definitely encouraging for the industry.”
Reuters repored that Hunt said any changes to the pensions sector would be “evolutionary not revolutionary.” While some funds may push back on any mandates, it was reported that there is a list of funds ready to invest in “alternative assets.” Typically in the UK, pension funds are highly risk averse today.