This week British microchip designer Arm filed to sell its shares in the US for $10 billion after its owners chose New York over London to list with.
The Cambridge-founded company is often referred to as the “crown jewel” of the UK’s technology sector – although since 2016 its owner has been Japanese investors Softbank, so the nation can’t legitimately claim full tech sovereignty over it.
The UK government is keen to position the nation as a leading light in the fields of technology and science – proclaiming with every grant awarded that it has the potential and ambition to be a tech and science “superpower”.
But while the country has world class universities that have fuelled a glittering array of tech startups (including Arm back in 1990) as well as world-leading fintech and life sciences sectors, a missing piece of the jigsaw has been funding.
Specifically, the stark funding gap which exists between start up and scale up which historically has led to foreign investors snapping up Arm and other companies such as London-based AI-start up DeepMind, which was sold to Google in 2014 and is now a central plank in the US tech giant’s AI chatbot arms race.
For entrepreneurs looking to start a tech business in the UK, there are several effective tax relief initiatives to hand – the EIS and SEIS both do a good job of supporting tech companies and their founders through seed and series A rounds.
But just at the point where they are ready to scale up, when they can make a meaningful difference to the domestic economy – creating jobs, research, R&D, many are forced to look abroad for late-stage capital to secure the £20 million to £150m they need to grow.
Even today scale ups are looking towards the US for venture capital funding – and taking with them an important part of the economic ecosystem.
Last year Tech Nation found that around 70% of all UK scale ups in 2021 were funded by foreign venture capital.
At the biennial Investor Showcase summit last month, organised by Tech London Advocates and Global Tech Advocates, serial entrepreneur turned investor Eric Collins of Impact X noted that among his portfolio of 25 companies most were “not finding in the UK the movement of risk to support the businesses”.
Collins added that, subsequently, his firms, which include many founders from underrepresented groups, “are looking to the US for fundraising and finding more of an appetite there”.
This notion of Britain as not supportive of tech businesses has not been helped by Microsoft president Brad Smith’s backlash last week after the UK’s Competitions and Markets Authority blocked the tech giant’s takeover of game developer Activision Blizzard, a move, which UK regulators argued, would stifle the UK’s nascent cloud gaming market.
“Global innovators large and small will take note that – despite all its rhetoric – the UK is clearly closed for business,” Smith lambasted.
A report published earlier this year, A New National Purpose, saw two unlikely bedfellows – former Labour Party UK Prime Minster Tony Blair and erstwhile Conservative Party leader William Hague – put together a convincing set of recommendations looking at how Britain might restructure its institutions to transform the country’s fortunes.
The one about digital identity cards grabbed most of the headlines, but another recommendation was to more effectively deploy the capital the UK already has.
One such measure was unlocking a small percentage of the UK’s estimated £4 trillion pound pension pot.
The report stated: “The UK has the second largest pensions market in the world but despite this advantage, overseas pension funds invest 16 times more in venture capital and private equity in the UK than domestic public and private pensions do.”
As an example, the report looks at the £330bn Canadian Pension Plan which, in 2021, invested £300m in one UK based company.
“This is equivalent to more than the entire UK pension system invested in private equity and growth capital (£190m) that year,” the report noted.
At Investor Showcase last month, the issue of pension funds was raised repeatedly – with former banker and CEO of the Scale Up Institute Irene Graham emphasising that the issue needed to be dealt with urgently as more tech companies abandon the UK for elsewhere.
“What we really have to address is the big issue the UK has compared to its international competitors. And that is that institutional money is not coming in, as pension capital, to our start ups and growth economy,” she told delegates.
The New National Purpose report noted that the Canada’s CPP was able to make significant investments in high growth companies because of its size: in 2022 it managed £330 billion in assets, making it 1,000 times the average size of a UK private-sector pension fund.
The UK market, meanwhile, is fragmented with over 5,300 schemes with an average size of £330 million.
Anne Glover, CEO of Amadeus Capital, a campaigner for getting the UK’s financial institutions to invest in riskier asset classes – including venture capital – explained at Investor Showcase this year that the small size of these individual pots means that fund managers tend to favour risk-adverse strategies yielding low returns.
She claims that this has resulted in a rise in investments in cheap-to-originate assets such as government bonds, property and index trackers – all of which have taken a hit now that interest rates have risen, providing an even lower return for Britain’s pensioners.
“It’s not worked – it led to the LDI crisis when a sharp rise in interest rates forced pension funds to sell assets – often at significant losses – to meet liquidity calls required by the fall in values,” she said.
“So now they [fund managers] are looking at derivatives as an asset class – but why put it in derivatives when you can put it into long term productive finance which is tech entrepreneurs who need the money and can put it into something really valuable in the long term,” she argued.
Blair and Hague’s report recommends consolidating the UK pensions system from 5000 to 100 or less, creating a £100bn UK Fund with a mandate to invest 25% of its assets in home grown infrastructure, equities and growth companies.
Glover maintains that even just a “small sliver” of a big fund’s total assets overall would deliver better returns for investors as well as fuelling the basis for the UK’s scale ups to stay put and contribute to future Big Tech companies that would affirm the nation’s status as a tech superpower.
One blocker to the pension pot has been layer-upon-layer of pensions and financial services regulation. Intended to protect the consumer, it is now forcing advisors, trustees and actuaries to push everything into gilts and bonds.
The current regulation also does not favour investment in forward-looking industries.
According to data from Friends of the Earth, UK pension funds invest £2000 in fossil fuel for every person in the UK, while the current rules make it hard for a company to invest in a single green tech, clean tech or deep tech company.
And while most of the bigger pension funds have pulled out of tobacco investment – many still do – including North Yorkshire County Council’s Pension Fund (despite running its own quit smoking service).
So, what’s being done behind the scenes to make the reforms needed firm up the UK’s standing, if not on par with China or the US, then at least on an equal footing with other smaller tech nations such as Japan or Israel?
Well, more than Microsoft’s Smith would have you believe. Even prior to Arm’s spurning of the London Stock Exchange, many quarters of the UK’s finance industry and the government have joined forced to put a plan into action.
A taskforce was set up last year headed by London Stock Exchange Group CEO Julia Hoggett to support wider regulator reform and develop the UK’s capital markets.
There are also a few key reforms currently going on, designed to make the UK a more competitive place to do business.
These include, but are not limited to, the FRC Review of Corporate Governance, The Edinburgh Reforms, designed to drive growth and competitiveness in the financial service sector and the Hill Review designed to change the listings rules to make London a more favourable place to go public.
As part of the Edinburgh Reforms there’s also a review, chaired by Rachel Kent, a senior partner at Hogan Lovells, into the UK’s research and investment analyst landscape – which helps attract large global firms to list in the UK.
Both Prime Minister Rishi Sunak (a former financial investor himself) and Chancellor Jeremy Hunt are supportive of the reforms – with Hunt due to announce actionable measures in the Autumn Statement.
As one insider told TechInformed last week: “It may not look like it now, but under the surface the paddles are going furiously to address many of these issues.
“This is the first time I remember where we’ve got the government, the regulator the ecosystem all pulling in the same direction.”
While assured by the government’s backing, Glover is concerned that these initiatives are taking too long to click together.
“There are about five difference initiatives going on all of which have identified the problem, but which are all pushing slightly difference answers that need to coalesce into one solution,” she told delegates at the Investor Showcase.
In the meantime, the Scale Up institute’s Graham urged the tech industry to keep educating institutional investors on the merits of investing in tech firms as a growth stock.
“We all have a role in helping our institutional investors understand the opportunity and that’s something we’re focussed on with Global Tech Associates – how we broker that information because our institutional investor base doesn’t understand the great growth economy we have here,” she said.
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