Kerry Baldwin runs a ‘deep tech’ venture capital fund and chairs the government body looking to facilitate greater DC investment into private markets. She tells Emma Simon why this could deliver benefits for pension savers, the UK’s most innovative start-up firms, and our economy
Today’s dragon hunters aren’t stalking Tolkien-esque caves but seeking hi-tech start-ups with the potential to deliver multi-million pound valuations. They are, in other words, still looking for hidden treasure, but in IP-rich climate- and neuro-tech, cyber hardware or computational biology, rather than hoarded gold.
Kerry Baldwin is a managing partner of IQ Capital, a firm she set up in 2005, which now has more than $1bn in assets under management. This runs frontier technology venture capital funds, and Baldwin says a key element of this is finding these elusive ‘dragons’ — a single investment where the returns cover all investments made across the fund, ideally several times over.
Alongside this, Baldwin is also chair of the Pensions and Private Capital Expert Panel. This was set up to facilitate greater DC investment into private markets, with the view of delivering better returns for pension savers, while boosting investment into an economically important sector for the UK.
As a former chair of the British Private Equity and Venture Capital Association, she is a vocal supporter of what she calls the UK’s “outstanding” science and technology sector.
“The UK has some of the most innovative early-stage venture capital sectors in the world and is recognised internationally as a leader in science and innovation. Investors in private capital have earned up to 41 per cent more than in equivalent public equity.”
She points out that the Labour Government is keen to prioritise growth, and greater pension investment into productive finance is clearly a key plankof this. This continues work set out by the last government under the Mansion House Compact.
Baldwin says the expert panel is making significant headway. “This is one of the first times that those representing savers, pension fund providers, and venture capital and growth equity managers have sat together to really try and understand each other’s worlds — to understand the opportunities and challenges for DC funds to invest in private equity and venture capital.
“Our job is to find the solutions to enable DC pensions to invest in these illiquid asset classes.”
The expert panel consists of 18 representatives from pension providers, independent trustees and private capital firms, and has both ministerial and regulatory support. “Underneath this, the technical expert groups have over 60 firms providing valuable input into the regulatory, legal, and tax implications of the decisions being made,” she explains.
Baldwin says it is clear that more investment is needed in this sector. “In 2022, UK-managed venture capital and growth funds received approximately £432m from international pension funds and just £48m from UK pension funds. That really isn’t a lot.”
Greater investment should help bolster returns for UK schemes, ultimately helping deliver better retirement incomes for members. As Baldwin points out, this should be a matter of some urgency for policymakers, given that the industry’s own figures estimate that only 35 per cent of households saving into DC pensions are on track to meet just a ‘moderate’ level of income in retirement.
Greater investment from DC schemes should also help ensure more of today’s start-ups stay in the UK should they grow into tomorrow’s leading tech players, delivering jobs and economic growth in the UK.
At present, Baldwin says many companies move overseas to attract the funding they need to scale up and develop their technology, meaning other countries benefit from the start-ups the UK has fostered.
She cites one example but says there are countless others. “The fund I run invests in a company called Nyobolt, which is developing new high-powered batteries with significantly faster charging times, enabling electric vehicles to be fully charged in under five minutes.
“But the next funding round is likely to be from US-led large pension funds and corporate investors. So what is likely to happen is that the team migrates to the US rather than scaling up here in the UK.
“Many of these start-ups are way ahead of their time, but it is corporate investors and overseas pension funds that are taking big stakes in these companies and reaping the rewards, where it could have been UK pension funds taking these positions.”
Types of private equity fund
Baldwin makes it clear that from a DC perspective, schemes will be looking to invest in a range of different private market investments, across sectors, and at different stages of their development.
Private market funds specialise in different areas of the market and have different risk and return characteristics as a result. She says: “At the early stage, you have seed funds that tend to invest in early-stage companies. A typical fund might be between £20m to £100m, and they probably pull together 10 to 30 companies per fund, holding these investments for six, eight, or more years.” These investments are often in university spin-outs, developing novel technologies or materials, or new drug developments in the healthcare sector.
“They require capital to try and find product-market fit with customers, and this can take some time as this technology is often replacing legacy incumbents,” she says.
Then there are Series A funds, which Baldwin also runs. She says: “These tend to raise slightly larger funds, around £100m to £200m. They invest in around 10 to 20 portfolio companies, taking a slightly larger ownership stake. These companies have typically already built the product or have some customers but are starting to internationalise and find repeatable sales.”
Next are growth equity funds. Baldwin says these are larger in size, typically around £300m to £1bn, and invest in slightly later-stage companies. “At this stage, they tend to have between 10 and 15 companies, and they are really specialising in developing these companies, building scale, often on an international basis.” She says these funds are participating in much larger funding rounds and may be developing companies with a view to a public listing.
Of course, not all start-ups or later-stage investments will become global tech giants. Many may not reach scale or fail to deliver the promised sales or technological innovation, meaning investors do not get a return on their money. This is where the concept of the ‘dragon’ comes into play, delivering sufficient returns to cover those that fail to make the grade.
“In my first fund, I had a dragon that paid the entire fund back, and in my second fund, I’ve got a dragon that’s likely to pay the fund back six times over,” says Baldwin.
Baldwin typically raises funds every three to four years, and in each fund, she invests in about 30 companies.
She clearly has a good track record for spotting investment opportunities. She started in venture capital in 1998 at Venture Technologies. This deep tech early-stage fund gave Mike Lynch, the founder of one of the most successful British tech firms, Autonomy, his first £1m when his firm was then called NeuroDynamics.
Since founding IQ Capital, the team has also overseen investment exits to Oracle, Meta, Apple, and Google.
Active stewardship
Baldwin stresses that private market investors are, by definition, active investors — whether at the start-up or later stage of funding — and take a much more hands-on role with companies. This stewardship element will be important for DC schemes, she says, particularly as many of these early-stage businesses are developing solutions to meet the most pressing global and societal challenges, including climate technology and the energy transition.
But this is also one of the key reasons why the costs are significantly higher to invest in this sector. This has been one of the key barriers to investment for DC schemes, although regulatory changes are addressing this.
A closer look at the role that managers like Baldwin play helps explain these higher fees, particularly when compared to computer-driven index funds.
She says: “We are active investors. In order to make the most of these investment opportunities, I have to source and guide the founders, monitor, report, and implement governance and ESG requirements. I have to attract and retain talent, find investors for the next round of funding and keep abreast of competitive and legal changes across the markets these companies operate in to assess how new technology might impact them. Overall, I am helping companies build their product and ensuring they grow sustainably so they can exit and generate returns for my investors.
“This isn’t turning up to a board meeting once a month. This is day-in, day-out work, constantly on the phone, working with new teams who may be experiencing many of these challenges for the first time.
“To help, I have an effective network that links experts to leading professors across Europe who really understand the background of many of these technologies. We run a fellowship programme where we train leading PhDs in entrepreneurial and venture capital skills, and in return, they tap into their network and help us with deep due diligence.”
She points out that this active ownership model allows these funds to exert significant influence over these companies, certainly in contrast to publicly-listed firms. “Our active ownership model empowers and incentivises us to drive sustainability improvements and ESG monitoring, allowing us to make a positive impact on society and the environment.
“These offer compelling stories for DC schemes seeking to drive member engagement. Look at what has happened in Australia — members are taking a very active interest and want to know where their pension is being invested, and they really want to understand the potential benefits of these investments.
“I think are going to see more and more of this active management in the UK.Savers will want to know if
they are invested in wind farms or carbon capture technology.”
Of course, the crunch question for DC schemes will be whether higher charges ultimately lead to significantly increased returns for members. While funds like Baldwin’s have delivered, the question remains whether UK schemes will be able to appropriate private market investment opportunities or hunt out the dragon hunters best placed to deliver them.