Patient capital investment is only for the brave (Birmingham Post article 22.11.2018)

Pension funds may soon have greater freedom to invest in entrepreneurial British businesses.

That was one outcome of the recent Budget as Chancellor Philip Hammond sought to boost small start-up companies.

However investors need to be cautious because the so-called ‘patient capital’ sector is not for the faint-hearted.

It can produce big returns but equally there is a greater risk of losing everything.

The Government’s direction of travel has been clear for some time.

It commissioned a review of the possibilities in November 2016. That review, which had a panel including renowned fund manager Neil Woodford, reported back at the end of last year and called for the lifetime allowance to be increased to allow for patient capital investment.

In June the Government revealed a new £2.5 billion injection for UK high-growth potential companies fed via British Patient Capital, launched through the British Business Bank.

Its first investments were £30 million into listed venture capital firm Draper Esprit and £9 million in the Dementia Discovery Fund, aimed at creating new medicines to combat an illness which affects 850,000 largely elderly people in the UK.

Then, part of the Autumn Budget, it was announced that the Government would support pension funds looking to get involved, with several of the largest defined contribution pension providers committed to work with the British Business Bank to explore options for pooled investment in patient capital, including Aviva, HSBC, L&G, NEST, The People’s Pension and Tesco Pension Fund.

Next year a discussion paper will be published by the Financial Conduct Authority that will look at how the UK’s existing fund regime enables investment in patient capital. The FCA will also consult on updating rules to allow unit-linked pension funds to invest in an appropriate range of patient capital assets.

Opportunities are already burgeoning, Mr Woodford’s Woodford Patient Capital Trust being one example.

It states: “Despite some of the best universities and finest intellectual property, the UK’s record of converting this into commercial success is poor.

“This is primarily due to a lack of appropriate capital investment. A long-term ‘patient capital’ approach can help businesses fulfil their potential while also helping to develop the UK’s ‘knowledge economy’ and support much-needed economic rebalancing. Unrivalled and untapped growth opportunities offer potential for outstanding long-term returns.”

But the potential for “extremely attractive rewards for success” had to be balanced by the risk of capital loss as some businesses would inevitably “fail to fulfil their potential”.

Kay Ingram, director of Public Policy at LEBC, the retirement adviser, expressed her concerns to Money Observer.

She said: “While encouraging start-up capital investment is a worthy aim of the Government, it is unlikely to be a suitable investment risk, except for the wealthiest savers.

“The higher returns possible from this type of investment come with higher risk of losses and are usually only considered suitable for those with surplus assets and capacity to wait for the investment to deliver, without needing access to their funds.”

Ed Monk, associate director for Personal Investing at Fidelity International, told the magazine: “For investors, many of the greatest investment growth stories these days take place not in the listed space but within small start-ups supported by private equity. Tapping into that growth is bound to be attractive to many.

“However, these investments are by their nature highly uncertain, and their illiquidity – lacking a ready-made market of buyers ready to buy shares if you want to sell out – adds a degree of risk. Such high-risk investments are unlikely to take up more than a small chunk of savers’ portfolios.”

Wise advice and an assessment I would very much support.