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12 Jul 2023

Life sciences A to Z - I is for investment allocation

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On the evening of Monday 10 July the Rt Hon Jeremy Hunt delivered his first Mansion House speech as the UK Chancellor of the Exchequer.

Amidst the Palladian splendour of the official residence of the Lord Mayor of London, his survey of the state of the British economy was delivered against the backdrop of a cost-of-living crisis and persistent inflationary pressures. Reiterating the Government's determination to tackle inflation, and bring it back in line with the 2% target, the Chancellor doubled down on Prime Minister Rishi Sunak's characterisation of that mission as the number one priority. And as he explained, it must come first above all else, in order to unlock the PM's two other economic priorities – reducing debt and growing the economy.

Having set that context, a key element of the speech was dedicated to future growth. And in particular, plans to unlock capital for growth businesses in the UK, with a particular focus on the life science and technology sectors.

The Chancellor made no bones that he and the Prime Minister have big ambitions. While the UK may in the last decade have become Europe's largest life science sector, they want more:

"We want to be the world's next Silicon Valley and a science superpower, embracing new technologies like AI in a way that brings together the skills of our financiers, entrepreneurs and scientists to make our country a force for good in the world."

The Chancellor laid out three core elements for intended reform.

  • Incentivising companies to start and grow in the UK by strengthening our position as a listing destination – with London being the "global capital for capital" no less. As part of this, the recommendations of Rachel Kent's Investment Research Review have been accepted in full and market engagement is to commence to inform proposed rule changes on removing the requirement to unbundle research costs by the first half of 2024.
  • Simplifying the financial services rulebook with a tilt towards growth-friendly regulation, faster innovation with regulators and the repeal of almost 100 pieces of retained EU law deemed 'unnecessary'.
  • And most pertinently for capital hungry, life science companies an eye-catching proposal to unlock pension funds to provide greater liquidity for high-growth companies.

The Mansion House Compact

Worth over £2.5 trillion, the UK has the largest pension market in Europe, bolstered somewhat in recent years by the implementation of workplace auto-enrolment. But as the Chancellor observed, the core institutional investors managing those funds are not as highly invested in UK high-growth companies as their international counterparts. By way of example, defined contribution pension schemes in the UK invest less than 1% of their funds in unlisted equity, compared to between 5 – 6% in Australia.

With a view to addressing this imbalance Whitehall has engaged with leading pension schemes, insurers, asset managers and experts to construct what has been dubbed the 'Mansion House Compact'. A commitment, signed up to by leading players in the pension world, to increase their allocation to growth capital. Many of the country's largest defined contribution (DC) schemes – Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart pension, M&G and Mercer – who together represent two-thirds of the UK's entire DC workplace market have signed up to the objective of allocating at least 5% of their default funds to unlisted equities by 2030. It is thought that if the remaining DC market follows suit, this could potentially unlock up to £50 billion of investment into high growth companies by that time.

£50 billion. Over the next six years.

And with a clear steer from HMG that the life sciences sector is intended to be a principal beneficiary of this largesse, it is little wonder that the BIA welcomed the announcement as "a watershed for our sector" and "a seminal moment when it comes to UK investment into biotech". In its recent review of UK biotech financing, the BIA noted that 2022 was the third best year on record for investment into private companies, with some £1,210 million raised from the venture markets, predominantly in early stage and seed rounds. Could the unlocking of a hefty slice of £50 billion be the much-awaited panacea for those companies seeking later stage and bigger ticket investment?

The jury is yet out, and consultations no doubt lie ahead. But with a strong steer from the Chancellor that all final decisions will be made ahead of the Autumn Statement later this year, and with what looks like a happy incidence of joined up thinking from policy-makers and the financial services sector to get behind the ambition of making the UK a science superpower, this was an encouraging statement about the direction of travel. A direction that is unlikely to shift whoever governs after the 2024 general election.

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