The British Business Bank is perhaps not well-known in the adviser community, but it currently stands as the largest domestic investor in venture capital and early stage companies in the UK.
It has a portfolio worth £3.9bn through the investment vehicles of VC funds’ equity stakes, direct investment and debt programmes, including small loans to start-ups.
And now, according to its chief executive Louis Taylor, it is planning to launch its own fund to access pension funds – investment of which there is much talk – and use pension money to support British early stage companies and get some uplift for UK pension funds.
There is a view in government circles that in the race for ever-cheaper fees, pension fund managers have steered away from riskier, more expensive asset classes, and stayed in trackers.
But this has depressed performance, and now the pressure is to move away from price and deliver value, especially in the current defined contribution world, where performance is no longer an issue for employers.
Taylor says: “We are good [at scaling up businesses] but we could be so much better. If you look at the amount of money that the UK companies raise at the different stages of development, versus the US, by the time they get to round four, five, six, that can be three times what the UK can be raising.
British Business Bank
2022 to present: chief executive
UK Export Finance
2015-2022: chief executive
Department for International Trade
2016-2022: director general, Exco and departmental board member
Standard Chartered Bank
2004-2015: positions held include managing director; group corporate development; chief executive, Vietnam, Laos and Cambodia; chief operating officer group treasury.
“We want to increase the amount of money available to companies, so they grow a lot faster.”
The BBB is a government-owned development bank, whose shareholder is business secretary Jonathan Reynolds. It employs around 150 investment professionals, many of whom are experienced at due diligence in VC investing, and have largely come from the private sector.
With VC funds, the BBB is typically approached by a fund manager in the private sector with a request for funding, and once they are on board, that convinces other external investors to join, although the BBB needs some convincing that the external investors are keen to start with.
With this fund, which is in the middle of construction at present, it would be the BBB’s own fund, and they would put some of their money (it has a permanent capital base of £7bn), and they plan to pitch it to institutional investors, for allocation from the pension funds that they run.
“We’ve been doing a lot of work on market engagement. We believe the appetite is cross-political – everyone wants more investment by institutions. So far the new government seems very supportive.
“[As for the institutions], they’re increasingly open; in the past month L&G, Schroders and Phoenix have been announcing new vehicles to invest in a range of private assets. These private market assets offer the opportunity of better returns – that’s recognised by master trusts, even the smaller schemes.
“UK institutions are not investing in this part of the market. The VC ecosystem is one of the top three in the world. Our ability to commercialise it is held back by the availability of capital. The potential is something that can be captured by pension funds.”
But the big question for those on the receiving end, namely the consumer whose money is being invested, is the issue of risk. Early stage company investing is seen to be even more risky than private equity, where at least the investor is buying established businesses.
With early stage companies, these are businesses that are looking to get to the next stage of their development and need the money to do so.
Taylor says: “You’ve got to kiss a lot of frogs to find the prince. You have to do due diligence, and you will see a lot go under. The ones that survive generate more than enough return to mitigate this loss.”
It is for this reason that VC funds typically do not take large stakes in early stage businesses in the same way as private equity does. And Taylor insists they are experienced in this field.
“We have already invested in 70 growth funds; these funds are invested in 1,200 companies. Some of these companies need more money and we can help with direct investment as they are then growing and they become more established.
“We may create something with an element of fund of fund investments. One of the core skills we have built up is fund manager selection; also an investor in later-stage companies as they scale up, and we’re hoping to open up these skills to institutions.”
In its annual report released last week, the institution revealed that it had realised £28.5mn in gains in the past financial year, an increase on the £11.5mn on the previous year – this is money coming back to the BBB.
However, last year its two big funds had to be revalued downwards, by £59.9mn in British Patient Capital and by £18.1mn in British Business Investments. The IRR was 13 per cent and 12 per cent respectively.
The bank as a whole also had to record a £122mn loss, following a loss the previous year of £135mn, as it revalued many of its tech investments, which struggled in the tech stock downturn.
Taylor points out that in 2021-22, it made a £605mn profit, and sees the loss as an “accounting loss” and part of the deal with “volatile assets”. He adds that last year the bank invested £3.5bn of taxpayer money, which attracted £2.5bn of private sector money. This generated £8.4bn of additional economic activity, he says, and 39,400 jobs.
The annual report also says that costs were 1.26 per cent, down 20 bps on last year.
It is this last point that those saving into their pension, or at least their advisers, may have an issue with. VC funds are far more expensive than index trackers, following the similar private equity model of 2 per cent plus 20 per cent performance fee above a hurdle. The default scheme charge is 75 bps.
But Taylor does not see this as a major problem, because allocation to his (or any) VC/early stage fund would be tiny.
“The allocation they’re making out of their total funds is a very small percentage. We’re not looking for anything more than a single digit of pension capital. A small allocation to a higher fee fund is possible within the 75 basis point cap.”
It has invested in some significant companies. Accurx, a healthcare platform establishing itself in the NHS, received funding from the BBB, and has turnover of £32.6mn, although last year it made a £3.5mn pre-tax loss.
Another has been a recent investment in Pragmatic Semiconductor, a manufacturer of semiconductors, which is using the money to expand a production facility in the North East of England. It is currently loss-making, according to the latest annual report.
If there’s no capital they will go where the capital is, and will gravitate towards the US.
But moves are afoot with the new Labour government. Recently, it announced that the BBB would be “aligned” with the new national wealth fund, alongside the UK Infrastructure Bank, to facilitate investment in the private sector.
Much of the structure has to be worked out still, says Taylor, but he does not see the BBB being subsumed by the fund as the start-up loan part of the BBB’s work is not part of the national wealth fund’s remit.
Ultimately, Taylor’s job is to help deliver the government’s growth agenda and contribute to the British economy as well as offering a new vehicle for the UK’s pension sector, grappling with changing demographics and fund dynamics.
“We definitely see a gap in the capital available for businesses, and the government has an interest in seeing companies that are growing staying in the UK.
“If there’s no capital they will go where the capital is, and will gravitate towards the US, and will be a loss to the UK economy as they become interesting.”
For the pension trustees, “there’s a recognition for investment for more growth and these companies can provide good growth”.
Melanie Tringham is features editor at FT Adviser
