LONDON -- If Prime Minister Tony Blair really wants U.K. pension funds to increase their investments in venture capital, he needs to provide adequate incentives, said Ken Ayers of Frank Russell Co., London.
In a July 6 speech to the British Venture Capital Association, Mr. Blair called on British pension funds to increase their average 1% allocation to venture capital, noting U.S. pension funds have an average asset allocation of 5% to the area. (Data from Pensions & Investments show the average investment in private equity by the defined benefit plans among the top 1,000 plan sponsors was 1.9% as of Sept. 30, 1998.)
Mr. Ayers, who as a member of the investment committee of the U.K.'s National Association of Pension Funds is helping draft a response to Mr. Blair's comments, said the government needs to make it easier for British pension funds to invest in the asset class.
Primarily, the government needs to do two things, he said:
* Level the playing field by including venture capital in the minimum funding requirement calculations. (The Institute of Actuaries is working on overhauling the standards.)
* Encourage investment in venture capital by providing tax breaks.
Mr. Ayers also said Mr. Blair needs to define what he means by venture capital. Most U.K. venture capital funds finance management buyouts and not early-stage projects -- not likely what the prime minister had in mind, Mr. Ayers said.
The NAPF and the BVCA already have been examining barriers to pension fund investments in the asset class. Prior to Mr. Blair's comments, the two associations jointly had commissioned research on the subject from the London Business School. The study is expected to be released in November or December.
Mr. Ayers acknowledged that more than regulatory impediments hamper British pension funds from investing in the asset class.
Cultural issues, bad investment experience in the 1980s, increasing maturity of U.K. pension funds, liquidity issues and conservatism by trustees also hinder many U.K. pension funds from investing in venture capital.
In addition, pension funds generally have to be a certain size to obtain adequate diversification and justify the time required to oversee such investments, he said.
Nor are there enough venture capital funds to handle increased pension fund investment in the sector.
"If we tried to go from 1% to 5% -- or even 2% -- pension funds would have trouble finding projects to invest in," Mr. Ayers said.
The eventual emergence of specialized gatekeepers and funds of funds in the United Kingdom will speed pension fund investments in the area, he added. To date, Britain lags behind the United States in the formation of intermediaries.
Meanwhile, U.K.-based venture capital funds have outperformed U.K. pension funds during recent years, according to the British Venture Capital Association.
The funds returned a net of 30.1% in 1998, 28.8% on a three-year annualized basis, and 22.1% on a five-year basis, the association's annual performance measurement survey revealed. In comparison, U.K. pension funds returned 14%, 13.8% and 11% during those respective periods according to the WM All Funds Universe.
For the first time, the BVCA survey included funds that are invested outside Great Britain, adding some distortion to the figures.
Only 16 of the 189 funds surveyed were invested overseas.
The survey found that large management buyout funds performed the best in the long term, returning an average 22.9% over 10 years. Funds that invest in a full range of venture capital projects were the best performers last year, returning 64.8%.
However, early-stage funds were the worst performers in 1998, losing 27.8%.
That's because these funds largely were newer and incurred substantial startup costs, said Elissa Armstrong, head of research for the BVCA.