British Business Bank’s Louis Taylor: “In five years time we will be looking at a different pensions industry in terms of portfolio makeup.”

27 Dec 2024

Andrew Holt meets the chief executive of the British Business Bank to discuss how he is working to create successful UK businesses.

Interviews

Andrew Holt meets the chief executive of the British Business Bank to discuss how he is working to create successful UK businesses.

What does the British Business Bank do?

The British Business Bank was set up 10 years ago to drive growth across the UK by improving access to finance for small businesses, which, particularly in the wake of the financial crisis, were struggling to raise funding.

We have been able to deal with companies all the way through the scale up stage via a range of programmes that we have designed and operate largely though our delivery partners: banks, alternative finance providers and fund managers.

We have created 60 banking licenses since the financial crisis, 36 of which focus on small-business lending. We have also helped them by providing guarantees for their lending.

Where are the investment gaps?

Within the equity space there is still a gap in the UK. We are good at starting businesses and scaling them up, but we could be so much better.

For the past six or so years we have been setting up a commercial arm under British Patient Capital, which has been investing in venture capital funds and growth equity funds. There are more than 82 investments in those funds, and some 1,200 growth companies within their portfolios.

Some of them are bigger companies, so they need more money. We are starting to invest directly into those companies, many of which are science and tech led.

We are the biggest UK investor in venture and growth equity funds, but also the most active in later stage science and deep-tech companies. We hold more than 30 companies directly in our portfolio.

What in venture capital could appeal to investors? 

There is fantastic research and development coming out of universities, but it is not necessarily being matched with UK capital. Their needs are being met by capital coming in from overseas.

That is fine, up to a point. Once you have that capital from overseas, the likelihood of commercialising your company in the UK instead of gravitating to where the capital came from is diminished.

So what we want to do is stimulate the amount of domestic money that is going into those companies in order to retain them in the UK rather than just being an incubator of great companies which then go abroad to commercialise. We want to capture them and we want them to become economically significant.

The chancellor made an announcement on this, which has had major implications for the bank. 

The chancellor announced, amongst other things, that we [as a bank] are setting up the British Growth Partnership, which is going to be a new vehicle investing along similar lines as British Patient Capital. 

But importantly using not only government money but also some pension money to form, effectively, a fund where we are investing in venture and growth equity going forward. This will build a better UK industrial base on the back of those companies and give pension members greater returns.

Why is there a lack of UK capital going into these companies? 

There are quite a few structural issues that have been around for about 20 to 30 years that have caused a gradual reduction in involvement in this part of the market by UK institutions. That is being recognised now.

The Mansion House Compact and The Edinburgh Reforms are examples of how the [pensions] industry understands that a variety of things have to change if they are going to generate the pensions people want, especially in a defined contribution world.

If people are to get the pensions they want, two things need to happen. The first, people need to contribute more into their pension. The second is that money needs to be invested more for growth than it currently is.

The constraints around this are fees, the cost of due diligence and the inability of venture capital, perhaps, to get instant diversification, which is the biggest risk mitigant.

Some of these are genuine hurdles. What we are going to offer in the British Growth Partnership is instant access to a range of funds, which we have been investing in.

The pipeline coming out of those funds is going to be, hopefully, economically attractive, will generate good returns and enable pension funds to build up the expertise to do this themselves.

What conversations have you had with pension funds on this? 

It was back in July 2023 that the then chancellor [Jeremy Hunt] consulted with the market. The pensions industry has been unfairly criticised for not being interested in this part of the market. Our experience of talking to pension schemes shows that they are interested, but are struggling to find the right way in.

Being interested is fair enough, but they need to be the right type of investments.

You are right. It is about a range of private market assets, which includes real estate, private and public equity as well as venture and growth equity. There is a need to access a range of opportunities.

Has there been any negative feedback from pension funds? 

They all have concerns. Whether they have overcome them is another thing. But nobody has been negative, about either the concept of investing in this market, or the track record of the bank to manage a fund like this.

You have been under the radar for some time and quite a lot of things have come together. 

Well the world is full of unsung heroes. We have seen big opportunities, which are strong, but under-appreciated by our domestic audience.

At the [government-organised] International Investment Summit [in October 2024] the range of opportunities we saw, and are sat on, make for a fabulous goldmine. We just need to get on with mining it.

Do you have any objectives in terms of how big the British Growth Partnership becomes?

 We are looking to raise hundreds of millions of pounds. It is important to raise enough so that it is significant but not so much that it is disproportionate to the capacity of the market. Also if we raise a big fund that has a long investment period, the fee drag can be quite high.

What we are trying to do is raise a sensible fund, which we can raise relatively rapidly, because the pension funds we want to approach have a continuous flow of money coming in. We ideally would like to reach the point where we have a rolling fundraising programme, which could help with [investment] diversification.

Is that with pension funds in mind?

No, you can look at diversification on many levels, but I think it gives you an opportunity to operate.

How long have you set for this hundreds of millions of pounds to stream into the fund?

The first issue is we need to be regulated. We have submitted a regulatory application to the Financial Conduct Authority. It is important we go through the regulatory process because the market needs to know that we are serious. So that will take a little time. The chancellor announced we will be putting money to work in 2025.

Will that be in the first quarter?

It will be later in 2025. It doesn’t mean money isn’t going into the market. Our normal investments are still working.  If there is private sector money available for these opportunities, we shouldn’t be using government money. There will be an overlap with what our British Patient Capital subsidiary does and the Business Growth Partnership.

But there will be a preference for the British Growth Partnership because there is private sector money in there. And all those investment decisions for the British Growth Partnership will not be taken by government. There will be a focus on the same fiduciary duty as that of pension trustees, who are giving us their money. It is returns-driven, commercially focused.

You have a good track record in your investment career, but how have you found this role?

On one level you could see this is as a little different, but it is convincing people of an investment opportunity. Through various parts of my career I have been doing that, so it is a slightly different spin on that.

It is something I believe in and we can do in a way that is beneficial for economic growth but also the returns to pensioners. And frankly, the legacy they leave in companies.

Thinking about what I, and the bank, are doing, is to look at it this way: in the US, 70% of venture capital comes from pension money.

In the UK, it is 10%. And when you strip out overseas pensions, the British Private Equity & Venture Capital Association believe that only 3% is from UK pension schemes. Investing in these companies is what we are suggesting they can do to change that.

These numbers have been used by government for some time, but the situation is that pensions funds are not going for these assets.

It is true that these assets form a small part of most pension fund allocations. [Pension funds] need to be proportionate and prudent. A lot of them don’t have any venture capital in their portfolios, but we think a small allocation can achieve better returns.

What percentage recommendation would you say should be part of a pension portfolio? 

It is not for me to recommend anything to pension trustees. Although I have been a trustee of defined benefit and defined contribution schemes, so I understand the constraints they are under and the fiduciary duty they have. But what we are proposing is not incompatible with fiduciary duty.

How can the barriers to investing in these areas be overcome? 

There is an element of education, but in five years time we will be looking at a different pensions industry in terms of portfolio makeup. Whilst I understand there is a real resistance to pay fees, there is a recognition of looking at net-of-fees value generated.

There will be a curve, gradual at first. We will start to pay sensibly for access to the best assets in these classes because they are going to generate better net-of-fee returns.

Take life sciences, there is a real perception that they are incredibly risky. Of course, there is risk in any industry, but the risk-adjusted returns are better there than almost any other sector. We need to highlight the disparity between the perception of risk versus the real risk.

You have committed to a new LIFTS investment. What is the story behind that? 

The Long-Term Investment for Technology and Science (LIFTS) is a potentially game-changing initiative. With the intention of catalysing more than £1bn of funding, including from UK pension funds, LIFTS will support the growth and ambitions of the UK’s most innovative science and technology companies, which with the right finance and support can become the world-beating businesses of tomorrow.

The British Business Bank completed a £250m investment alongside Phoenix Group with Schroders Capital under the LIFTS initiative to create a new investment vehicle that is accessible to pension funds and other institutional investors.

The bank’s £250m commitment will be matched by £250m of pension investment from Phoenix Group, the UK’s largest long-term savings and retirement business, creating a £500m investment vehicle. Phoenix’s investment will be made through Future Growth Capital, its new private markets joint venture with Schroders.

You have also recruited a new chief investment officer in Leandros Kalisperas. Why is he a good fit?

As we build the capabilities we need to respond to these new opportunities and we are fortunate to have recruited such a strong talent for the bank.

Leandros will take on responsibility for the entirety of the British Business Bank’s investment business, which includes its commercial subsidiaries: British Business Investments and British Patient Capital.

His scope will also include the newly launched Nations and Regions Investment Funds, the Enterprise Capital Funds programme, as well as sourcing and delivering investments for the new British Growth Partnership.

What then is your key message to our readers? 

The central message is investors can be sceptical about some investment opportunities, which they should be healthily sceptical, but in terms of this asset class we are convinced that there is a way into these assets which could generate great returns and represents, on our doorstep in the UK, something quite special.