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Pension funds agree to invest billions in UK startups

July 13, 2023

In a bold move to boost the nation’s startup ecosystem, the UK government has announced a plan to unlock billions of pounds from pension funds for investment in unlisted equity.

The plan, known as the Mansion House Compact, involves an agreement between nine of the UK’s largest pension providers, such as Aviva, Legal & General and M&G, to allocate at least 5% of their default funds to private and high-growth companies by 2030. The government estimates that this could unlock up to £50 billion if all the pension schemes in the UK followed suit.

The chancellor, Jeremy Hunt, said that the plan would benefit both pension savers and entrepreneurs, by boosting returns and supporting homegrown innovation. He also said that the government would consult on doubling the existing local government pension scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.

The plan is part of the government’s ambition to turn the UK into “the world’s next Silicon Valley and a science superpower”. The UK has a vibrant startup ecosystem, but often struggles to raise growth capital from domestic investors. Most of the funding for UK startups comes from international investors, especially from the US.

The government hopes that by increasing the involvement of UK pension funds in the startup sector, it will create more opportunities for British companies to scale up and stay in the UK, rather than being acquired by foreign rivals or listing overseas. The plan also aims to make public listings in the UK more attractive for fast-growing companies, by reforming some of the rules and regulations that govern the London Stock Exchange.

The Mansion House Compact is not just about supporting startups, however. It is also about providing better returns for pension savers. The government believes that by investing more in unlisted equity, pension funds can achieve higher returns than they would by investing solely in traditional asset classes such as bonds and listed equities.

According to Jeremy Hunt, the reforms could increase the retirement income of an average earner by over £1,000 a year. This means that not only will entrepreneurs benefit from increased access to capital, but pension savers will also benefit from higher returns on their investments.

In conclusion, the Mansion House Compact is an ambitious plan to boost investment in UK startups by unlocking billions of pounds from pension funds. By increasing the involvement of UK pension funds in the startup sector, the government hopes to create more opportunities for British companies to scale up and stay in the UK. At the same time, it aims to provide better returns for pension savers by investing more in unlisted equity.

Matteo Zaccagni

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