David Merton, Executive Director, Fulcrum Alternative Solutions at Fulcrum Asset Management, writes that the UK has no shortage of entrepreneurial talent, boasting world-class universities, a deep venture ecosystem, and a strong track record in early-stage company formation.
Yet, many promising firms stagnate compared to international peers or are sold to overseas buyers. The result? A persistent gap of homegrown “unicorns” — companies valued at more than USD1 billion — relative to the UK’s potential. By contrast, more than 60 per cent of the value in today’s US-listed market comes from former venture capital (VC) backed firms. Recent research published by Fulcrum Asset Management considers this capital gap and outlines what could be done to help the UK to be a leading light.
Current support
The UK performs well at seed funding due to a variety of government initiatives to support this part of the market. It is well-documented that, as companies scale, support reduces. Fulcrum outlines that US pension plans allocate 2-3 per cent of assets (on average) to VC whereas in the UK, allocations have been a fraction of that historically (c. 0.5 per cent). Moreover, most is likely invested in the US.
Barriers to wider adoption
Several factors explain why UK institutions, and by extension the average resident, have little exposure to early-stage businesses, and some actions to mitigate these issues:
- Structures & terms
VC funds are small (GBP130 million on average, with high fees). With small funds, asset owners need to commit to a large number to achieve a meaningful and diversified allocation. Continued inorganic consolidation amongst asset owners doesn’t help, with the average VC fund being only 0.26 per cent of a GBP50 billion pension scheme. However, this introduces opportunities for those able to allocate. - Delegating to passive
The move to global passive mandates has taken money out of the UK. While passive investing is cheap, there are drawbacks: minimal company engagement and an increasingly concentrated, US-centric portfolio. - Risk of loss
VC investing comes with significant risk and high manager dispersion, making the job of an asset owner more difficult. Diversification, control of overlap between managers, and reducing fees and expenses can help reduce this risk. - Competition for capital
VC competes for capital with other private market asset classes, which are typically cheaper and more liquid. Net VC returns have also not always beaten these asset classes either. Fees are critical.
We believe that the industry needs to – and more importantly, can – adapt to overcome these barriers to attract long-term institutional capital. The Long-Term Asset Fund (LTAF) structure and government Mansion House initiatives have started to catalyse this change.
Economic Implications
Drawing conclusions from Europe, we find the lacklustre market vitality to be largely a capital allocation problem. The EU creates more companies per year than the US, owing to a larger population, supported by world-leading universities and ‘centres of excellence’.
This lack of capital means firms do not scale to become globally dominant, influencing where innovation clusters, job creation, tax revenues and the reinvestment of profits happen. Huge ‘flywheel’ benefits accrue to the US from repeat entrepreneurs like Marc Andreessen reinvesting their wealth into new ventures.
A vibrant Opportunity Set
The UK is the 2nd best place in the world to start a company, has the 3rd largest VC market, and is one of the most innovative places in the world[1]. It also offers compelling valuations in the scale-up market, particularly compared to the US. We also see potential catalysts in Mansion House reforms, changes to regulation to allow (certain) investors into private markets, and clients moving away from global passive mandates.
Unlocking the Next Phase of Growth
The missing UK unicorns are not down to a lack of talent or ambition. Instead, the limited available capital as companies develop is stifling growth. Rebalancing away from an excessive reliance on global passive strategies, combined with pragmatic access to growth assets, could materially strengthen the UK capital market ecosystem and therefore potentially provide excellent returns for participating investors.
With the right capital in place, the UK (and Europe) has the foundations to rebuild a vibrant IPO pipeline and retain ownership of its most innovative businesses, for the benefit of local investors and citizens. The grass is greenest where you water it.
