The British Business Bank said there were active discussions to be had what fees it would charge on its new Growth Fund initiative, which will be used by DC schemes and others to access venture capital investments.
Speaking at Corporate Adviser’s Master Trust and GPP conference the British Business Bank’s CFO David Hourican said he did not have an “active solution” at present but added the bank was looking to offer a “stable investment solution, which therefore can’t have a fee that is not acceptable to its market.”
Many private equity investments levy performance fees, typically on a ‘2 and 20’ basis — but there are concerns from the DC sector that these are too high, and also create problems with intergenerational unfairness. Recent legislation explicitly removed performance fees from the charge cap on default DC pension funds.
Hourican said that in the 50 to 60 meetings the Bank had had with those working in the DC and wider pension sector since the Mansion House reforms were announced, fees had been either “number one or number two on the agenda”.
He said the next step would involve more detailed discussions with the industry.
He also addressed queries as to the likely minimum investment required to access the Bank’s new Growth Fund – specifically designed for the pension industry. He said there was no minimum threshold planned at present and the Bank had been talking to schemes of all sizes.
Hourican pointed out that while many pension schemes had signed up to the Mansion House compact, pledging to invest up to 5 per cent of their portfolio in private assets, he anticipated a far smaller slice of this being invested in the kinds of assets the Bank has experience in – be it venture capital or private debt.
He said that in Australia DC schemes, which have built up a track record of investing in private assets, typically only have around 20 per cent of their private asset holdings in venture capital.
Hourican gave delegates an overview of how the Bank operated, pointing out that it had now been running for almost 10 years and was the biggest domestic investor into venture capital in the UK.
It will shortly invest £250m of government money into the Long-Term Investment for Technology and Science (LIFTS) initiative – designed to encourage investment into science and technology start-ups, as well as expanding its £375m into its Future Fund: Breakthrough programme which are direct investments into high growth R&D investments.
The new Growth Fund, which was announced by the Chancellor yesterday, has been designed to build on the Bank’s permanent capital base and has been designed to help DC schemes and others access this space following the Mansion House reforms. Plans to launch the fund have received positive support from eight major DC pension providers, including Aegon, Aon, Aviva, L&G, M&G, Phoenix, Smart Pension, and USS – who collectively manage over £350bn of assets.
Hourican pointed out that investments to date, had delivered a net internal rate of return of between 17 and 22 per cent for venture capital funds and 5 to 9 per cent for private debt holdings to March 2023.
He said that there was a lot to be positive about when looking at the UK venture capital market, which in terms of performance only slightly lagged the far bigger US market. It said it also was outperforming the rest of Europe by some margin.
There UK was supported by its university sector, when it came to developing pipelines for future venture capital opportunities particularly in science and technology. Hourican pointed out that the UK had three of the global top 10 universities.
Hourican added that while the UK did well when it came to early stage funding for venture capital, it lagged the US in latter funding stages. This presented an “real opportunity” for UK PLC and institutional investors he said, particularly as these latter funding rounds are typically less risky.
The British Business Bank he said had experience across seed, venture and growth funding. “We do all three and can see across the ecosystem although all three many not necessarily be suitable for pension funds,” he added.
