Leading UK venture capital firms, managing over £25 billion in assets, have signed a government-backed agreement to work with pension funds to allocate £50 billion of investment to the best high-growth companies.
Named the Venture Capital Investment Compact, the agreement aims to make UK pension funds limited partners in the venture funds they manage.
Today's initiative aims to build on previous commitments by nine pension providers to invest at least 5% of default funds into unlisted equities by the end of the decade, known as the Mansion House agreement (or the Future Growth Fund).
Among the 20 firms that have signed today's compact are Amadeus Capital, Octopus, Balderton, Northern Gritstone, Lakestar and SV Health Investors.
Currently, just 0.5% of defined contribution pension assets are invested in unlisted UK equities such as venture capital and growth equity, according to research by the City of London Corporation.
So far this year, UK startups have attracted US$15 billion in investment from venture capital firms, but much of it from across the Atlantic, with US investors the largest source in the third quarter, according to a report from HSBC Innovation Banking and Dealroom.
Next month, Chancellor Jeremy Hunt's autumn statement in November where he is expected to provide some more detail on proposals to unlock some of the billions held in pension funds to support UK growth.
Last week it was reported that Hunt's department, the Treasury, is facing resistance from some pension funds over the Mansion House agreement, which is designed to mobilise up to £50 billion of contributions for investment in projects and businesses that support economic growth.
Some pension funds have expressed concerns about the lack of suitable investment opportunities, the high-risk nature of the sectors the government is targeting, and the attractiveness of the UK as a destination for their capital.
City bosses earlier this month also called for an extension of the plan to allow funds to be invested into listed small and mid-cap stocks.
Chancellor Jeremy Hunt hailed today's compact as a "huge win" and said it "could boost British pension pots to the tune of £1k".
Rather undermining Hunt's Mansion House push, it was reported by the FT that the MPs pension fund invests just 1.7% of its fund in UK-listed companies.
After a challenging year for fundraising and recent poor IPO performances globally, this news is welcome for growth businesses and could encourage a more similar VC investment environment to the US, said Myles Milston, co-founder of fincap Globacap.
“Today’s announcement means that a huge amount of extra capital will be available for VCs in the UK to invest in high-growth industries such as the tech sector," he said.
"These VCs will then have to deploy this capital which means finding more investment opportunities, taking more risks and investing in more early-stage companies.
"Over time, this will be really positive for the startup and innovation ecosystem in the UK, enabling entrepreneurs to access funding earlier in the cycle and accelerate their businesses quicker, similar to how the VC landscape currently works in the US."
He said investors like pension funds have "battled with laborious, manual and time-consuming private market transactions which often take weeks or months", while private markets have increased funding and offer other attractions that have made them more accessible and an attractive alternative to public markets.