The Government is facing mounting pressure to encourage pension funds to invest in a new investment vehicle designed to support growing British technology start-ups.
Encouraging a new wave of investment into so-called “scale-up” businesses will be a central recommendation in the Kalifa Review of the UK’s financial technology sector that will be published this week.
Ron Kalifa, the former head of payments processor Worldpay, was commissioned by chancellor Rishi Sunak to review how the UK’s £7bn financial technology industry can continue to grow after Brexit.
He will call for Government support to bring typically risk-averse pension funds and insurers into a new £1bn growth fund aimed at helping a new generation of financial technology businesses to raise money from the UK instead of requiring US capital.
“I think it would be great,” said Ed Lascelles, a partner at venture capital fund AlbionVC. “Any initiative that helps support what we see as a relative funding gap should be encouraged.”
Incentivising more pension fund money flooding into the technology sector has been on the wishlist of British technology start-ups for years.
A 2019 report from the Centre for Policy Studies that was commissioned by food delivery app Deliveroo called for the Government to amend ISA rules to allow pension funds to allocate more of their capital towards growth companies.
Accepting investment from US backers often means that companies eventually relocate to the US, with the economic benefits of the start-up’s success then accrued outside of the UK.
“When you’re a certain size, the majority of funding offers come from the US with everything that comes with that. We know that sometimes what comes with that is a requirement for the management to relocate to the US,” Mr Lascelles said.
But there are concerns that a £1bn fund will not provide a meaningful solution to a significant funding gap that sees fast-growing businesses such as Monzo turn to US investors for money.
“£1bn of additional capital is very welcome but that is in the context of an already successful existing VC landscape,” said Charlie Delingpole, the chief executive of ComplyAdvantage which provides services to start-ups as well as incumbent banks.
“It will be important to be meaningfully differentiated from the commercial growth funds of which there are many,” he added.
The proposed £1bn fund is thought to be modelled on the £2.5bn Business Growth Fund, but with a focus on supporting businesses that have progressed beyond the initial start-up stage.
The Kalifa review is also expected to call on incumbent banks to work more closely with start-up rivals in an effort to improve banking services and to finally remove decades-old databases that have slowed progress on initiatives such as Open Banking.
It will also recommend an easing of float rules that will be designed to encourage prominent technology businesses to float in London rather than New York. Technology businesses should be allowed to float while maintaining a dual-class share structure that allows founders and senior executives to retain more voting power and control over their businesses, the review will suggest.