Britain’s “Future Fund”, overseen by the state-owned British Business Bank (BBB), is completing its third year of operations this week having delivered GBP1.14 billion of investment in startups during the pandemic – yet performance is mixed, criticism is fierce, and the possibility of a fully-fledged UK sovereign wealth fund remains dim.
The fund is a first for the British government, which has yet to establish a fully-fledged sovereign wealth fund despite political murmurings of support. The idea of the fund was to bridge a gap between equity rounds at a time of pandemic-induced economic upheaval.
Ken Cooper, Managing Director, Venture Solutions at the BBB, said, “The Future Fund was created to ensure a flow of capital, at the height of the pandemic, to companies that would otherwise have been unable to access government support schemes, while ensuring long-term value for the UK taxpayer. The Future Fund is now entering the maturity phase, which signals three years since the first loans were executed. This is likely to increase the level of transactional activity rapidly over the coming months.”
Launched on 20 May 2020, and open for applications until 31 January 2021, the Future Fund issued 1,190 early-stage companies with convertible loans of GBP125,000 to GBP5 million – provided they could achieve at least equal match funding from private investors. The loans would turn into equity in any subsequent funding round or if a firm goes public.
By the end of March, the Future Fund had equity interest in 529 firms following 30 conversions in the first quarter of 2023. The number of companies going out of business also began to grow in the latest reported quarter, partly due to weakness in the wider UK market and the rumbling banking crisis.
No Future for Some
The fund has received plenty of criticism, directly at Prime Minister Rishi Sunak who created it while serving as Chancellor of the Exchequer, the UK’s cabinet member for finance. Questions were raised as to whether it was value-for-money and simply propping up “zombie businesses” that would otherwise fail without state money.
Poor governance, corruption, and lack of due diligence were dominant themes around the British government’s handling of the pandemic and the Future Fund was not immune from criticism. In a scathing article published last month, The Guardian said, “Many of the fund’s loan recipients were neither startups nor fast-growing. Some had connections to Sunak and the Conservative party, while others had wealthy investors, such as the Duke of Westminster or EasyGroup tycoon Stelios Haji-Ioannou. Still more simply proved to be bad bets, going bust and leaving the taxpayer on the hook for millions.”
Yet, the latest figures show the number of business failures represented 9% of the total, which is not a significantly high level in venture capital. Research by Harvard Business School professor Shikhar Ghosh found that on a global scale 30-40% of startups backed by venture capital funds fail completely, another 30-40% manage to return the original investment to investors, and only 10-20% of venture-backed startups bring in the real investment returns. So far, exits have been achieved in 4% of companies backed by the Future Fund while 44% have seen loans converted to equity, indicating they won further financial backing. A further 42% have not failed, exited or engaged in further venture capital fund-raising.
It may be too early to write off the fund as a failure – and it could be argued that the emergency lifeline it provided at the height of the pandemic was always going to be high risk. The investments were not entirely reckless given the circumstances. The requirement that applicants achieve match funding provided some security, sharing risks and due diligence with other investors and lenders. Yet, with just over GBP1 billion in convertible loans, the fund’s broader impact on the economy was always debatable. It represented less than 9% of the estimated GBP13.3 billion of venture capital invested in the UK in 2020 – and that year was the second highest on record, after 2019.
As a year of extreme disruption, 2020 provided significant opportunities for venture capital investment worldwide – a trend that the UK failed to harness due to the added risks and uncertainties posed by Brexit. It was not the pandemic that cut off venture capital to British start-ups, it was the Johnson administration’s push for hard Brexit that chilled investors.
A Future Future Fund?
The experience with the Future Fund will influence ongoing debates over the potential creation of a British sovereign wealth fund. Politicians have proposed an array of mandates and funding sources, including the opposition Labour Party’s manifesto to create a SWF focused on renewables infrastructure. Many proposals have hit the dust over the years, due to a lack of realism and experience. At times, some think tank white papers published by politicians on both sides of the aisle demonstrate extraordinary naivete, suggesting there is still a steep learning curve despite experience with the time-limited, strategic Future Fund.
In truth, there are few assets at the British government’s disposal to seed a fund on a scale of the UK’s developed market peers – privatization receipts were largely used to plug deficits that would have arisen under the tax-cutting stimulus of Thatcherism. Having cashed in the family silver for short-term economic boom, the British government remains in perennial fiscal deficit, with no surplus to seed a fiscal stabilization fund.
Commodities are also commonly used as a basis for long-term savings and strategic investments. The UK missed the boat in terms of utilizing North Sea energy royalties for inter-generational savings. The North Sea could still seed a potential UK SWF through the auction of seabed licences for offshore windfarms. However, lingering feudalism in the British political system could be an obstacle with seabeds officially part of the Crown Estate, the official assets of the monarch.
By 2022, the Crown Estate estimated its marine portfolio was worth GBP5 billion (US$6.3 billion), a 400% rise since 2016 due almost entirely to renewables. As a result, marine assets in the Crown Estate generated US$168 million in revenue in 2022 - almost a third of its total revenue. And the value of the assets will rise further with carbon capture and storage (CCS) with the UK seabed possessing room to store 78 billion tonnes of carbon dioxide – the equivalent of 200 years’ of the country’s annual emissions.
Unless King Charles III relinquishes some of the privileges conferred on him through his recent coronation, the UK will fail to capitalize on the potential wealth generated by its seabed assets that could be used in long-term economic strategies.