The Chancellor has announced a series of planned reforms in his annual Mansion House speech, aimed at making it easier for small companies to raise money and to help revitalise the UK stock market.
Which includes, plans for large defined benefit pension funds to invest 5% of their assets in private equity and early-stage companies, with the intention to facilitate pension consolidation.
There are proposals to scrap Mifid II rules around research on smaller listed companies and support for a new trading venue for private companies.
Nicholas Hyett, Investment Analyst at Wealth Club said, “The Chancellor has some big ideas for small companies. His efforts to improve access to later stage funding for UK start-ups are very welcome.
“The success of the SEIS, EIS and VCT schemes means the UK is now the start-up capital of Europe, but we’re still struggling to support companies in transitioning from plucky, disruptive start-up to global tech giant.
A lot of that is down to the difficulty raising later stage capital in the UK. Entrepreneurs either have to look abroad or sell up to an established global player – and that means the UK economy is missing out on the benefits of having its own Apple or Nvidia. However, there are no easy fixes and reforms need to be handled carefully if they’re to deliver the hoped for benefits without inadvertently damaging the UK’s already impressive investment ecosystem.”
- Pension fund investments into growing businesses – “needs to be handled with care, but well worth encouragement”
“UK pension funds have been winding down allocations to UK companies for years, if not decades, turning away from risky equity bets in favour of reliable government bonds that can be matched up with future pension payments. There are lots of perfectly sensible reasons for that.
Firstly, most defined benefit pension funds are now shut to new members, and their remaining members are either in retirement or soon will be. With more short-term liabilities and fewer out in the distant future, funds can’t afford to take the same level of risk.
Secondly there’s the move towards “liability driven investment”, where a pension funds’ liabilities are matched specifically to future government bond payments. This was meant to reduce risk, and while the panic after the mini-budget last autumn proved that nothing in investments is a sure bet, there is some genuine logic to matching liabilities where you can. Forcing pension funds to abandon bond investments in favour of substantially increased risk would be a mistake, in our view.
However, there are attractive returns to be made in smaller companies, and holding them as part of a diversified portfolio makes complete sense for a pension fund – just as it does for an individual. This is particularly the case for the defined contribution schemes that are now the norm for millions of investors – with the government estimating increased investment in private equity could add £1,000 a year to an average retirement income. Large VCTs have delivered an average return of 90% over the 10 years to the end of March – better than the main stock market over the same period.
Increased interest from pension funds would also be welcome news for existing investors in smaller companies through schemes like EIS, SEIS and VCTs – providing the next stage of funding to already successful start-ups, and potentially creating a new route to exit.
If pension funds can be encouraged to invest in UK start-ups, where they see genuinely attractive opportunities, that would be good news for everyone – pensioners, investors and entrepreneurs alike.”
- Intention to facilitate pension consolidation – “seeking to emulate the best in the world”
“Consolidating smaller, fragmented pension funds is an attempt by the government to emulate the world’s most successful retirement systems in Australia, Canada and the US, and is key to making investment into smaller companies viable.
Venture capital is a scale game, only 1 in 10 investments will deliver impressive returns and several will fail. Investors need to spread their money over tens, if not hundreds of companies, to help mitigate the substantial risks, and that’s only possible for pension funds of a certain size.
Consolidation of smaller DC pension schemes also has the potential to reduce costs. Put that together with higher returns from private company investments and the net result is a better retirement for millions of savers.”
- Scrap Mifid II rules around research on smaller companies – “good riddance to bad regulation”
“We have always viewed the rules restricting the promotion of free research on smaller and medium sized companies as far more damaging than the problem they set out to solve. The collapse in research on smaller companies made stock markets less dynamic, reduced trading activity in smaller companies and probably hit retail investors hardest.
Europe is already looking to roll back some of these rules and the UK should absolutely follow suit, although it may take years for smaller company research to regain the vibrancy it once had.”
- A trading venue for private companies – “ambitious, maybe too ambitious”
“At first glance a trading venue for private businesses looks like an oxymoron – private business are, by definition, illiquid and don’t trade their shares on an exchange. If such an exchange generated lots of volume then what would separate it from a public exchange, and if volumes are low then what is the point. It’s also not a new idea. Trading venues for private companies already exist – both from specialists and crowdfunding platforms.
As ever the devil will be in the detail, but as things stand this feels like an ambitious policy that may ultimately struggle to deliver.”