Could venture capital firms miss out on the great pension fund start-up splurge?

The UK’s top pension fund managers are poised to pump billions into the UK’s start-ups – but venture capital investors keen for cash may play a smaller part than they had hoped, writes Charlie Conchie

“This compact is a huge win,” Jeremy Hunt wrote triumphantly back in November 2023.

The then-Chancellor was responding to the news that some 70 firms had just signed up to the so-called Venture Capital Investment compact, launched days after the much hyped Mansion House Compact, which committed ten of the UK’s top pension money managers to investing five per cent of their assets into so-called growth companies. 

According to Hunt, the follow on VC pact showed that the UK’s “world-renowned Venture Capital firms stand ready to help our pension providers allocate funding to our high-growth companies.”

The two deals seemed similar in name – but there was a key difference. There was no actual agreement between the two. Mansion House had been coordinated by the government and the City of London Corporation, while the venture capital equivalent was put together by the British Venture Capital Association to show the industry, unsurprisingly, stood ready and willing to receive a flood of money.

However, its involvement may now be under threat altogether. The biggest names to back the Mansion House Compact – L&G, Phoenix and Aviva – could be making a go of it themselves.

All three firms have launched dedicated private markets platforms in recent months. Aviva yesterday launched a new venture capital arm, Phoenix teamed up with asset management giant Schroders on a similar venture, and L&G launched a newly beefed-up private market platform earlier in the summer.

Should the companies decide to take the investment management in-house, the venture capital industry’s involvement may be a lot smaller than hoped. And VCs are warning it’s a bad idea.

“If the venture arms that are being created are to invest as a “fund of fund” then it makes sense, but if these pension funds think they can invest directly then it will be a recipe for failure,” one venture capital boss told City A.M. 

“Large corporate venture vehicles rarely work, and often get wound down in time when the next generation of management realise they should be allocating capital to standalone and experienced funds with long track records rather than try to do it themselves.” 

Taking the investment operation in-house would be “madness”, the person added. 

As the anonymous boss noted, the launch of the private market platforms is not necessarily a death knell for VC involvement.

Henry Whorwood, managing director of private market research firm Beahurst, points out the new platforms could simply be a precursor to pension firms becoming limited partners [LPs] in funds managed by established venture capitalists.

“It makes sense for them to have these arms; I think the crux of it comes down to what the investments made by these arms end up looking like, I would be surprised if they didn’t end up taking LP stakes in certain VC funds, but these arms will possibly give them the option to direct invest,” he told City A.M..

Michael Moore, chief executive of the BVCA, was sanguine about Aviva’s announcement yesterday and said the body had been working “constructively to drive more pension fund investment into fast growing companies”.

“The launch of Aviva’s new venture capital fund demonstrates innovation from the UK pensions industry which will help scale high-potential start-ups and deliver strong returns for pension savers,” he said.

However, for venture capital money managers hungry for injection of pension money, the devil may be in the detail.