UK wants pension funds to invest in pre-IPO tech companies

The UK is trying to encourage more of its pension funds to pump money into tech companies before they go public, as part of a wider effort to make London a hub for fast-growing innovative companies.

UK funds are lagging their US counterparts in investing in tech startups, which is hurting their returns, according to Chris Philp, Britain’s minister for technology and the digital economy.

Compared to North America, “UK funds are massively under-allocated to tech venture capital and that means they are missing out on the return opportunity offered by pre-IPO tech,” Mr Philp said in an interview.

While venture capital investments could help boost pension fund returns after years of below-average returns, fund managers have generally been reluctant to expose retirees to riskier investments. UK public pension funds account for around 12% of money invested in the venture capital market, compared to 65% in the US, according to a 2019 report by the British Business Bank.

The UK is already taking steps to attract more tech companies to London. It’s about rewriting listing rules to allow founders to retain greater ownership of their companies even after they go public, opening up new visa avenues for talented people, and expanding credits for tax for research and development.

The efforts have borne some fruit. About a third of quotes in London last year came from tech and consumer internet companies, but these had mixed results in the stock market, food delivery firm Deliveroo and chip designer Alphawave IP Group is now trading below their issue price.

“Tech in the UK is growing faster than ever, but for the startup ecosystem to reach the next stage of its development, we will need to change the small conservative approach to pension fund management that limits funds to low-growth asset classes and allocates more to areas like venture capital,” said Dom Hallas, chief executive of Coadec, a London-based group that champions start-ups in the UK. “The change will not only be good for future tech startups, it will also be good for future retirees.”

Keen to attract more London listings of tech companies, officials at 10 Downing Street met on Monday with leaders of high-growth firms such as digital bank Oaknorth and global payments provider Checkout.com, which with 40 billion, is Britain’s most valued startup.