With my previous columns I’ve been no stranger to highlighting the social and economic value of high R&D spending sectors like tech and, in particular, life sciences. At its very best, their work can help shape societal progress – think back to the development of the COVID-19 vaccine, for instance – and as such, their work can have the excitement factor to lift the national mood and inspire confidence.
The reality is, however, that the vast majority of R&D projects won’t produce anything like the results that the headline-grabbing advances do. Often the objectives for R&D are more incremental, or offering benefits in important, but ultimately, more niche areas. Factor in the inherent risk, market saturation in key segments and, sometimes, high attrition rates in certain sectors and you can also find yourself with a reliance on a relatively small pool of specialty investors willing to offer up funds.
Aside from the challenges inherent within R&D funding, inflationary pressures continue to be the biggest barrier for a number of investors. Inflation has the potential to hinder investment and innovation, setting the UK back further. In a climate where the public purse is tighter than ever, where private investment is tightly scrutinised, and where the wider public might view R&D as an unnecessary luxury, it’s vital that we ensure we’re opening up new sources of funding for UK innovators. This is where patient capital comes into play.
Unleashing patient capital
Patient capital tends to refer to those non-bank institutional investors like pension funds and some fund managers that, unlike many in private equity for instance, aren’t looking for immediate, short-term return on investment and are more willing to wait and see their gains materialise over extended periods of time. Such investors are typically willing to ride out difficult periods – including those driven by high-inflation environments – and stay the course on illiquid assets that are unlikely to see tangible returns for, potentially, decades. Long-term patient capital is absolutely critical to growth, and for filling funding gaps in the tech and life sciences spaces.
The challenge has historically been in attracting these kinds of investors into private credit markets for R&D-heavy businesses. There are significant opportunities to be had, however. What Bruntwood SciTech’s recent £500m deal with the UK’s largest local authority pension fund – Greater Manchester Pension Fund – and Legal & General, shows, is that even in this climate the right proposition can stimulate inward investment and support economic improvement, as well as utilise long-term, patient capital to play a crucial role in the growth of the domestic innovation sector.
Looking to Australia and Canada provides further positive examples of how this can be achieved, with their major pension funds delivering strong returns for investors, whilst also pumping billions into high growth, R&D-heavy industries.
Broadly speaking, the need to unlock more of these patient capital sources and replicate the success seen in other markets is something which the UK Government understands and is aiming to encourage. In what could well be his last pre-election budget, Jeremy Hunt doubled down on his Mansion House reforms which aim to encourage pension schemes to allocate at least 5% of their funds to private credit for unlisted businesses, unlocking up to £50bn for high growth companies. In the budget we saw that efforts to enforce this are ramping up, with consultations beginning with the Association of British Insurers on a framework. It does represent a different approach to the Australian or Canadian models in that it would ultimately mean a more hands-on approach from the Government when it comes to dictating portfolio allocations, but its aims and objectives are much the same.
It’s imperative that progress on these key policies continues in order for the UK to realise its ambition to be the preeminent global science superpower, and a major leader in tech. In what is more than likely to be an election year, it’s vital that we don’t lose sight of an aim that will take longer than any one Parliamentary term or most MPs’ tenures to fully realise.
Closing in on Science Superpower status
The latest available data shows that UK R&D spending as a portion of GDP is in a strong position at between 2.9-3.0% – above OECD and EU averages (HoC Library). Although such performance still trails the top spenders in Japan (3.27%), Germany (3.13%) and the US (3.47%). Making progress and moving closer towards the top of the R&D spending tree is certainly achievable, but requisite increases in spending would also need to be sustainable. Plugging this gap, therefore, is a role that’s perfectly suited to investors with a patient capital strategy and that have significantly diversified exposure elsewhere in order to be able to swallow short-term losses.
Pension funds are the prime candidates here, but they are by no means the only source of patient capital. Public funds are also vital sources of investment on this front. Take, for instance, the UK agency ARIA which is responsible for seeking out high-risk, high reward projects to invest public money into. Just in the past few weeks, for example, they’ve committed £42m to an ambitious research programme aimed at reducing the costs of the silicon-based digital infrastructure required for AI by a factor of 1000. ARIA’s parent agency, UK Research & Innovation, also has significant patient capital to deploy, with a sizable budget of £8bn to invest.
Progress towards our national ambitions won’t be achieved overnight, and so funds with patient capital strategies are well-positioned to incorporate initially loss-making, but highly innovative R&D projects. It’s now on the industry, however, to continue banging the drum for UK tech and life sciences, and showcasing their vision for their role in a modern UK. Only then will such investors be unable to pass up on the opportunity.
