Why start-ups and venture funds need to take note of the Labour Party

Labour Shadow Chancellor, Rachel Reeves, is using a trip to the US to continue the Labour Party’s push to be seen as the party of business and innovation. This follows a number of recent announcements by Sir Keir Starmer and the Shadow Health Secretary, as well as by former Labour Prime Minister Sir Tony Blair. The focus of this week’s announcement is to boost the amount that British pension funds invest in early-stage companies.

She has lent her support to the idea to create a £50 billion fund, in which every defined contribution pension fund would be expected to invest 5% of its assets in start-ups. As we have previously discussed, the proposal was first made by the new Lord Mayor of the City of London last year. Rachel Reeves has so far stopped short of calls for this to be mandatory, and instead is hoping to encourage pension funds to do so on a voluntary basis.

Previously there has been a perception that some British pension funds are not equipped to undertake such risky investments. In response to this she has suggested that the British Business Bank would invest alongside the new super pension fund, undertaking the necessary due diligence.

As part of this, she has highlighted the trend for high growth British businesses to favour the US for any listing. One common reason cited by successful British start-ups is that there is not the domestic institutional market to fund their growth, forcing them to turn to the US (even if they would prefer to remain in the UK).

The Labour Party is continuing to try and outcompete the Government on its attempt to make the UK a science superpower. Earlier this year Prime Minister Rishi Sunak launched a dedicated Science and Technology Framework to support such companies. Chancellor Jeremy Hunt also tried to use the recent budget to promote the sector, including reforms to pension funds. However, the budget deferred proposals on key areas such as pension funds or listing reform, despite some recent changes by the UK’s Financial Conduct Authority.

Regardless of who wins the general election, expected in 2024, it seems likely that we will see some reform designed to encourage (or force) defined contribution pension funds to invest in more venture capital-backed British start-ups.