Chancellor’s “Mansion House Reforms” – how might they affect investors?
In his first Mansion House speech, on the evening of Monday 10 July, Chancellor Jeremy Hunt unveiled groundbreaking plans that could transform the prospects for both investors and young British enterprise.
As part of the reforms, Hunt announced nine of the UK’s largest pension providers – collectively representing over £400 billion in assets – have agreed to a voluntary “compact”. They have committed to investing at least 5% of their default investment plan in unlisted companies, startups and private equity by 2030.
It means British enterprise could potentially unlock up to £50 billion in patient capital funding by the end of the decade if other pension providers follow suit – helping the UK become “the world’s next Silicon Valley and a science superpower”.
What impact might this have on investors?
The UK’s pension market, worth over £2.5 trillion, is the largest in Europe.
However, UK pension investor returns have been lagging behind those from elsewhere in the world.
Part of the reason is what Hunt describes as the “perverse situation” we find ourselves in: UK institutional investors are not investing as much as their international counterparts in high-growth companies.
To put this into context, UK pension schemes currently invest under 1% in unlisted equity. This compares to between 5 and 6% in Australia and 11% in the US (public pension funds). The difference that makes is significant. In the US, pension funds’ allocations to private equity have produced almost twice the investment gains of public equities in the 22 years to June 2022.
With the Mansion House reforms, the Chancellor intends to “level the playing field”.
Whether or not the reforms will help secure better outcomes for pension investors – as the Chancellor hopes – remains to be seen. Investing in private companies is high risk and many believe it should be down to the individual, not their pension fund, to decide if the potential for greater returns is worth the greater risks.
Potential benefits for VCT, EIS and SEIS investors
The Mansion House reforms could also have less immediate but nonetheless far-reaching implications for VCT, EIS and SEIS investors.
The latest official records (2021/22 tax year) show these schemes channelled just shy of £6 billion through to thousands of young and entrepreneurial companies. They are an established and hugely valuable source of support to get new ideas off the ground and saw the seeds of innovation.
The Chancellor has previously recognised the role of the venture capital schemes “in removing obstacles which prevent the UK’s young, innovative and high-risk companies accessing the finance they need to grow.” Indeed, over the past decade the UK has become home to Europe’s largest life science sector, Europe’s largest technology sector, its biggest film and TV sector and its second largest clean energy sector.
However, it is not unusual for companies operating in these sectors to need more capital and over a longer period than VCTs and S/EIS are allowed to offer.
And once the tax incentives run out, the number of potential investors shrinks significantly, leaving many young companies struggling to fund their next stage of growth. Indeed, a 2020 report from the Scale Up Institute and Innovate Finance found the UK was facing a £15 billion growth capital gap that was stifling the technology sector’s ability to grow.
“Unlock better returns for savers and more growth capital for businesses”
This is where the injection of fresh funds promised by the Mansion House reforms could prove a game changer.
It could provide much-needed support for young British businesses to help them continue on their growth path. This, in turn, could translate into enhanced returns for early-stage investors, e.g. VCTs, EIS and SEIS investors.
Moreover, the Mansion House reforms could potentially make it easier for them to achieve an exit.
Once a large institutional investor comes in – the likes of the pension providers that have committed to the “compact” – it could present and opportunity for early-stage backers to realise their investment.
At the same time, the Mansion House reforms have promised several changes that should make it easier for the most ambitious companies to list on the main stock market and raise larger sums from investors more quickly. This, too, could make it easier for early-stage investors to realise their investment.
Overall, these reforms could be a good omen for VCT, EIS and SEIS and perhaps an opportunity for experienced investors to consider adding to the portfolio.
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