New UK pension pools have patient capital role – government consultation

Review of financing for innovation is advised by high-level group of experts

The UK’s nascent local authority pension fund pools could prove a boost for “patient capital”, according to a new government consultation into financing innovation.

The eight pools are currently being formed out of the 89 local authority pension schemes in one of the most sweeping changes ever in the sector.

“As set out in the guidelines establishing these pools of capital, this pooling will also enable administering authorities to improve their capacity and capability to invest in large-scale infrastructure projects and other illiquid or alternative assets, including venture capital and other forms of patient capital,” the government document states.

The consultation — in the context of the Treasury’s Patient Capital Review — is being advised by an expert panel chaired by Sir Damon Buffini, the former head of private equity house Permira. Members include names like Nigel Wilson (Legal & General), Neil Woodford (Woodford Investment Management), Gervais Williams (Miton Group), Tay Lim Hok (Singapore’s GIC) and Nikhil Rathi (London Stock Exchange).

Star fund manager Woodford’s firm launched a fund called the patient Capital Trust in 2015; it has grown to £829.5m.

Chancellor [Finance Minister] Philip Hammond, in the foreword to the report, said a lack of access to long-term investment is stymying the development of “young innovative firms, such as those commercialising research from our universities”.

The document argues that patient capital “requires experienced and talented fund managers”.“The challenges faced by a fund manager in raising his or her first fund,” it states, “create a natural market entry barrier to new fund managers and evidence suggests that successful fund managers in the UK are also able to scale up their activities less quickly than those in the US.” It said the UK could set up a programme along the lines of the Kauffman foundation’s ‘venture capital fellowship’ scheme.

Barriers to investing in patient capital among pension funds include a lack of scale at the individual fund level and the “perception of risk”.

Despite the Law Commission’s recent review of fiduciary duty, the paper cites stakeholders raising “questions about the quality of scheme trustees’ investment decision making”.

The paper calls for the “development of a more open attitude to investment in patient capital”.

Specific measures could include providing greater clarity about the ability of pension fund trustees to make investments in patient capital, the effect of existing legislation in permitting this kind of investment, practical examples of such investments, and more detailed guidance for funds “to satisfy themselves that they are acting prudently”.

The review comes five years after the government-backed Kay Review into market short-termism. Martin Gilbert, CEO of Aberdeen Asset Management, this week argued it has not made enough progress and that the review of fiduciary duty “has not yet been taken on board by institutions”.

The government consultation ends on September 22.