In the land that crime forgot it’s possible to impoverish a nation, party with the KGB, refuse to hand over your phone and still face no prime ministerial shame. But, if you’re a BBC newsreader….oh, forget it. In fact, knock me over with a Suella Braverman morality manual (a bit lighter than a feather) I’m actually cheering a different UK headline this week. Yep, the chancellor, Jeremy Hunt, has announced plans to allow pension funds invest in homegrown private companies, including startups. This is a big deal. Again, the numbers don’t lie and there are a few I would highlight…
- The UK is the largest pensions market in Europe. The ONS at the end of 2021 estimated gross UK pension assets of £2.7 trillion.
- Fresh pension savings inflows in 2021 alone were a whopping £115 billion.
- Nine of the biggest insurance companies in the UK market have agreed to allocate 5% of funds to private investments. This suggests pension giants like Aviva, L&G and Scottish Widows will free up an estimated £75 billion for investment in fast-growing startups.
Leaving aside the huge amounts of money potentially flowing into UK startups, this move signals a shift in risk tolerance at pensions and a recognition by government that startups can boost the wealth of the nation. The huge size of the US tech sector has definitely benefitted from VC funds receiving 70% of their capital from pension funds. In the, UK that percentage is just 20%. Savings wealth creation requires a bit of modelling but the British Business Bank found that the average 22-year-old could boost their total retirement savings by 7-12% with a 5% allocation to private investment/VCs. It is early days yet, but for those already investing in startups, this structural shift in private investment markets could have promising consequences. Three positives quickly spring to mind….
- More money chasing private investment opportunities pushes up valuations of startups. In fact, £75 billion looks almost too big a number. So, what if….
- Pension fund vehicles waited for startups to achieve a certain size and then buy them out? It is possible pension fund investment vehicles could become potential exits for startup investors before IPO or trade sale.
- The recognition by normally risk-averse pension/insurance giants that allocation to private investments can be part of a retirement savings strategy is a huge boost to the credibility of startups and their ability to boost wealth.
Only last week, I wrote that this is possibly the greatest time in history to be investing in startups so the timing of this UK announcement is interesting. It should also be a timely reminder that investment should be a habit not a headline chaser. My sense is that some people have stalled their investment decisions or strategies until the recession-worry headlines turn more positive. That could be an expensive pause, or to be more blunt, money never sleeps. Here are a few snippets which should tweak the interest of the startup curious….
- It is not just technology or AI which is hot. My sense of old economy, real assets is that they are due a re-visit just as Bidenomics is putting the entire US manufacturing sector on a decarbonisation re-set footing. How about good old fashioned cooking? Even Mediterranean-style restaurants? Check out the Cava Group restaurant-chain which has doubled in price since its New York IPO in June.
- However, we can’t ignore technology and specifically AI. The startup, Inflection AI, co-founded by LinkedIn’s Reid Hoffman, has just received $1.3 billion of investment from the likes of Microsoft and Nvidia. The company is just a year old and valued at $4 billion. Now, tech is not just a US story….
- Irish cyber security play, Binarii Labs, is in the middle of a funding round on the Spark Crowdfunding platform and has already smashed campaign targets in just 10 days. And why not? Breaking news this week of a €400,000 investment by the prestigious European Institute of Innovation (EIT) has an interesting little kicker; that investment values Binarii at €20 million but crowdfunding investors can buy in at a €6.7 million valuation. And… that’s before any EIIS tax rebates. That looks like an 80% discount worth checking out.
In many ways, the snippets above capture the compounding of some key drivers of the investment environment right now. Recall the UK pension announcement and then look at EIIS tax incentives. Also, think about the balance of opportunities presenting themselves in both old and new economies. And then think about the hugely enhanced pool of buyers compared to previous decades. It’s not just pension funds coming to the table. Cash rich big tech companies(Microsoft, Google etc), government innovation agencies(EIT, Enterprise Ireland), sovereign wealth funds, family offices and a wall of retirement savings(10,000 retirees a day in US) are all building portfolios of young companies and ideas. Sovereignty, innit. Nope, just supply and demand.
