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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, a former FT business editor, is a visiting professor in practice at the Grantham Research Institute
There are many uncertainties about the UK’s political future. But whoever forms the next government is likely to launch a “growth fund” to invest in the economy. Chancellor Jeremy Hunt has already tasked the British Business Bank to think through its design; Labour is proposing a “national wealth fund”. Both parties hope to attract big pools of institutional capital, particularly pension fund assets.
Pension assets in the UK total £2.5tn. Given that the bulk are currently invested abroad, it is understandably tempting to find ways to attract at least some of them back into driving economic growth at home. Any new government will be simultaneously cash-strapped and face huge investment needs. In London alone, the funding requirement for providing new social housing is forecast at £5bn a year.
Getting the design of any national wealth fund right is critical to attracting institutional capital at scale — the UK has much to learn from other countries, such as Australia’s Future Fund. However, neither the Conservatives nor Labour are approaching the design challenge in the most effective way. Plans under consideration at the British Business Bank envisage pension funds having access to the BBB’s own investments, offering a path for them to co-invest in high-growth companies under its guidance. Few are the venture capital investors, in the UK and elsewhere, who would be prepared to outsource due diligence in this manner.
Meanwhile, nine of the UK’s largest workplace pension schemes have signed up to the chancellor’s aspiration for them to invest 5 per cent of assets in private markets to support growth. In private, though, the pensions industry questions the government’s ability to achieve this goal in a way which does not put pensioners’ savings at risk. Shadow chancellor Rachel Reeves’ suggestion that pension funds might be mandated to invest in fast-growing UK companies elicits similar anxieties.
Out of — at the last count — 12 think-tank or academic proposals for a national wealth fund, few take into account the realities of aligning the interests of policymakers and private investors. They include proposals from the Tony Blair Institute for Global Change to consolidate the UK’s defined benefit and local government pension schemes into £300bn-£400bn megafunds managed by the Pension Protection Fund. But the PPF currently manages just £36bn of assets, using a very specific allocation model driven by its mandate.
Nearly all the proposals suffer from the same flaw. Too often, government and its institutions start from the premise that “if we build it, they will come”, designing ambitious top-down schemes that fail. The mixed legacy of the BBB’s Future Fund, set up to attract matched funding from the private sector into small UK companies, is a case in point. History demonstrates that designing a successful vehicle using capital from investors with different risk and return goals requires collaboration from the outset. Best practice involves respecting different stakeholders’ investment aims as well as their risk and return profiles.
Reconciling these different aims, when public and private sectors often seem to speak a different language, is not easy. But successful initiatives from the recent past, such as the Green Investment Bank, demonstrate the benefits of a process that identifies market failures, then involves both state and private investors in the co-creation of investment vehicles as an effective response. Recent research I have led at the London School of Economics suggests how such a collaborative approach might be used to design a successful national wealth fund.
It recommends creating a venture capital fund-of-funds, overseen by a government-backed institution such as the UK Infrastructure Bank. This would act as an umbrella for a portfolio of sector-specific funds, managed by commercial managers selected through competitive tender. These would invest in priority areas for the country’s future prosperity where the market has failed, such as renewable energy or housing retrofits. Portfolio companies would be incentivised to list publicly in the UK on exit. The initial £50bn fund-of-funds would offer appropriate risk diversification to attract large pools of institutional capital, including pensions.
Investment in the UK as a percentage of GDP is chronically low, and a national wealth fund is badly needed. But dragging the pensions industry kicking and screaming into such an initiative is not likely to maximise its success. Done differently, it could usher in a new era of productive collaboration between government and the financial services industry.
