April 12, 2024

How long-term patient financing can unlock the UK’s R&D potential

With my previous columns, I have been no stranger to highlighting the social and economic value of sectors with high R&D expenditures, such as technology and in particular the life sciences. At its best, their work can help shape societal progress – think back to the development of the COVID-19 vaccine, for example – and as such their work can have the excitement factor to lift the national mood and build confidence.

The reality, however, is that the vast majority of R&D projects will not deliver the results that the high-profile developments deliver. Often R&D objectives are more incremental, or provide benefits in important but ultimately more niche areas. Add to that the inherent risk, market saturation in key segments and sometimes high turnover in certain sectors, and you can also be dependent on a relatively small group of specialist investors willing to offer money.

Apart from the challenges inherent in financing research and development, inflationary pressures remain the biggest barrier for some investors. Inflation has the potential to hamper investment and innovation, causing Britain to decline further. In a climate where public finances are tighter than ever, where private investment is under intense scrutiny and where the wider public views R&D as an unnecessary luxury, it is vital that we ensure we unlock new sources of finance for UK innovators. This is where patient capital comes into play.

Freeing up patient capital

Patient capital generally refers to those non-bank institutional investors such as pension funds and some fund managers who, unlike many in private equity for example, do not seek immediate returns on short-term investments and are more willing to wait and see. their gains are realized over longer periods. Such investors are typically willing to weather tough periods – including those caused by a high inflation environment – ​​and stay the course on illiquid assets that are unlikely to deliver tangible returns for decades to come. Long-term patient capital is absolutely critical to growth and filling funding gaps in the technology and life sciences sectors.

Historically, the challenge has been attracting these types of investors to the private credit markets for companies that do a lot of research and development. However, there are significant opportunities. What Bruntwood SciTech’s recent £500m deal with Britain’s largest local pension fund – Greater Manchester Pension Fund – and Legal & General shows is that even in this climate, the right proposal can boost foreign investment and support economic improvement, at In the longer term, patient capital will play a crucial role in the growth of the domestic innovation sector.

Looking to Australia and Canada provides further positive examples of how this can be achieved, with their large pension funds delivering strong returns for investors, while also pumping billions into fast-growing, R&D-intensive industries.

Broadly speaking, the need to tap more of these patient sources of capital and replicate the success of other markets is something that the UK government understands and wants to encourage. In what could be his last Budget before the election, Jeremy Hunt doubled down on his Mansion House reforms, which aim to encourage pension schemes to allocate at least 5% of their resources to private credit for unlisted companies, freeing up to £50 billion for high debt. growth companies. In the Budget we saw efforts to enforce this increasing, with consultation starting with the Association of British Insurers on a framework. It represents a different approach to the Australian or Canadian models, in that it would ultimately mean a more hands-on approach from government when it comes to dictating portfolio allocations, but the objectives are largely the same.

It is imperative that progress on these important policies continues so that Britain can achieve its ambition to be the preeminent global scientific superpower and a major technology leader. In what will most likely be an election year, it is crucial that we do not lose sight of a goal that will take longer than any parliamentary term or the tenure of most MPs to fully achieve.

We are approaching Science Superpower status

The latest available data shows that UK R&D expenditure as a percentage of GDP is in a strong position at 2.9-3.0% – above the OECD and EU average (HoC Library). Although this performance still lags the top spenders in Japan (3.27%), Germany (3.13%) and the US (3.47%). Making progress and getting closer to the peak of R&D spending is certainly achievable, but the necessary increases in spending must also be sustainable. Bridging this gap is therefore a role perfectly suited to investors with a patient capital strategy and who have significantly diversified exposure elsewhere to absorb short-term losses.

Pension funds are the main candidates here, but certainly not the only source of patient capital. Public resources are also an essential source of investment in this area. Take, for example, the British agency ARIA, which is responsible for identifying high-risk, high-return projects in which public money can be invested. For example, in recent weeks they have allocated £42 million to an ambitious research program aimed at reducing the cost of the silicon-based digital infrastructure required for AI by a factor of 1,000. ARIA’s parent agency, UK Research & Innovation, has also invested significantly patient capital to deploy, with a significant £8 billion budget to invest.

Progress towards our national ambitions will not be achieved overnight, which is why funds with patient capital strategies are well positioned to take on initially loss-making, but highly innovative R&D projects. However, it is now up to the industry to continue to beat the drum for British technology and life sciences, and demonstrate their vision of their role in a modern Britain. Only then will such investors not be able to miss this opportunity.

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