The organisation, a state-owned development bank that aims to help small businesses access finance, is awaiting regulatory approval for its awarding of £250m to ICG and Schroders under its ‘Long-term Investment for Technology and Science’ (LIFTS) initiative.

The bank is looking to use LIFTS to channel institutional investment – particularly from defined contribution (DC) pension schemes – into innovative science and technology companies.

Taylor told Pensions Expert that cost perceptions and a lack of knowledge are deterring schemes from investing directly in these companies.

“That expertise with those companies and that part of the market, venture capital and growth equity, is not very prevalent across pension funds,” he said. “Part of the reason they’re not investing in this part of the market is because they don’t have that expertise, and it can be – or seem – quite expensive to them to get that expertise.”

A mindset change for pension schemes

Investing in scaling companies “does require a little bit of a mindset change for pension funds,” Taylor continued. “They have been regarded historically as being focused on keeping fees down, and less focused on the value in terms of net-of-fee returns generated by the money they put in.”

The Value for Money framework, currently being developed by the Financial Conduct Authority, the Pensions Regulator and the Department for Work and Pensions, aims to address this by encourage a broader consideration of factors when assessing services provided by DC schemes.

“Our argument is that, even if venture costs a bit more to do due diligence on to find the opportunities, and even if you do lose some companies along the way, if you’re properly diversified, if you’re invested in a range of companies, you will generate net-of-fee returns that are attractive,” Taylor said.

A former DB and DC trustee himself, Taylor said he was aware of the complexities faced by those charged with overseeing schemes when it comes to investing in areas like venture capital.

That said, he also acknowledged that there had already been “a bit of a mindset change” among some pension trustees and master trusts relating to their desire to take on “an appropriate element of riskier assets that have the potential to generate higher returns”.

The People’s Pension, one of the UK’s largest multi-employer master trusts, recently announced that it was boosting its internal capabilities in order to invest in private markets, while Nest this week announced that it was joining an existing partnership to invest in affordable housing.

Reeves urged to support fund

The LIFTS initiative was part of former chancellor Jeremy Hunt’s plans to channel pension scheme money into high-growth companies. The British Business Bank’s chief executive noted that incumbent Rachel Reeves is supportive of the idea as she also seeks to increase allocations to UK assets.

Taylor said he believes that more transactions beyond the Schroders and ICG deals will be possible “if the government is true to its word”.

“We will be willing to run more tenders along similar lines for whatever mandate the government wants us to pitch for, although obviously with the condition that it is going to be commercial, and therefore is attractive to third-party money,” he said.

“We very much hope that the chancellor will want to go ahead with this fund, which is going to be targeted at pension funds, to open up an asset class for them.”

Further reading

UK pensions: Scaling for success (12 August 2024)

How to get pension schemes investing in productive assets (12 August 2024)

Members must be centre of Pensions Review, industry says (25 September 2024)