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UK venture capitalists are discussing new ways to structure their funds as part of an agreement designed to support the government’s efforts to unlock British pension investment in high-growth companies.
The British Private Equity & Venture Capital Association (BVCA) wants to enlist about 20 funds in a “Venture Capital Compact” as part of the government’s Mansion House initiative, people familiar with the matter said.
Though the compact has not been finalised, likely signatories include SV Health Investors, run by the former head of the vaccines task force Dame Kate Bingham, and Cambridge Innovation Capital, the people said.
The compact would include a pledge to collaborate with the nine pension funds that signed up to the Mansion House agreement announced this summer, which the Treasury hopes could unlock up to £50bn of investment in riskier start-ups and fast-growing companies by 2030.
Venture capital firms will announce their intention to work to bridge the gap between how their funds operate and the needs of defined contribution pensions as part of the agreement.
The firms will commit to work on reporting valuations more frequently than every quarter and to explore mechanisms for improving liquidity to help defined contribution pension members move their money easily.
But the people said the compact is unlikely to address the fees charged by VCs, which are higher than other investment vehicles, and are one of the main barriers to pension groups investing in their funds.
“It will be a commitment to a good faith collaborative partnership to identify structures and fees that will work together. We don’t know where it is going to net out exactly,” a person familiar with the discussions said.
The compact could be published as early as October 25, when Jeremy Hunt, the chancellor, will speak to the City of London again at a pension summit in Mansion House.
Hunt’s Autumn Statement on November 22 is set to confirm ambitions to reform Britain’s pensions industry by channelling more funds towards illiquid assets.
The chancellor is also expected to outline further details on reforming defined benefit pensions and unlocking funds from local authority pension schemes.
The BVCA declined to comment. The Treasury said it was “working lock-step with industry — including venture capital funds” on its plans to unlock pension investment.
The Mansion House compact set an aim of getting at least 5 per cent of workplace pension default funds invested in unlisted equities by 2030.
The chancellor believes a bigger allocation to private market assets by retirement funds, alongside other pension reforms, could boost retirement income for average earners by £1,000 a year.
However, a government analysis, published alongside the Mansion House compact in July, found that some younger savers could be worse off if performance fees, typically attached to investing in areas such as private equity, were not lowered from current levels.
Venture capitalists commonly charge 2 per cent of assets under management a year and 20 per cent of profits above a benchmark.
One person close to the discussions said VCs were concerned that any agreement to cut fees could be seen as price-setting. Another said they believed pension funds should pay full fees for the highest performing VCs.
The Pensions and Lifetime Savings Association, the voice for workplace pensions serving more than 30mn savers, said fees were an issue with venture capital investments.
“It is well-known that investing in private equity and start-ups presents a higher cost than listed companies due to the additional research and due diligence required,” said Nigel Peaple, PLSA’s director of policy and advocacy.
“Our members, and the savers they serve would certainly welcome initiatives that drive more competitive fees,” he added.
