The U.K. Wants Pension Funds to Put Money in Pre-IPO Tech Firms

(Bloomberg) -- The U.K. is trying to encourage more of its pension funds to plow money into tech companies before they go public, as part of a broader effort to make London a hub for fast-growing innovative firms.

British funds are lagging behind their U.S. counterparts in investing in tech start-ups, a fact that crimps their returns, according to Chris Philp, Britain's minister for technology and the digital economy.

Compared with North America, “U.K. funds are massively under-allocated to tech venture capital and that means they are missing out on the returns opportunity provided by pre-IPO tech,” Philp said in an interview.

While venture-capital investments could help boost pensioners' returns after years of below-average yields, fund managers have typically been wary of exposing retirees to riskier investments. Britain's public pension funds account for about 12% of the money invested in the venture capital market, compared with 65% in the U.S., according to a 2019 report from the British Business Bank.

The U.K. is already taking steps to attract more tech companies to London. It's re-writing listing rules to allow founders to retain greater ownership of their firms even after going public, opening up new visa routes for talented individuals, and extending tax credits for research and development.

The efforts have borne some fruit. About a third of London listings last year came from tech and consumer internet companies, but these have had mixed results in the stock market, with the likes of food-delivery firm Deliveroo Plc and chip designer Alphawave IP Group Plc now trading below their issue price.

“Tech in the U.K. is growing faster than ever, but for the startup ecosystem to reach the next stage in its development, will need us to change the small conservative approach to pension-fund management that limits funds to low-growth asset classes and allocates more to areas like venture,” said Dom Hallas, executive director of Coadec, a London-based group advocating for startups in the U.K. “The change won't just be good for future tech startups, it will be good for future pensioners too.”

Keen to attract more London listings by tech firms, officials from 10 Downing Street met on Monday with top executives of high-growth companies such as digital bank Oaknorth and global payments provider Checkout.com, which at $40 billion is Britain's most-valued startup.