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Lord Jim O’Neill: There is too much talk, not enough action on start-ups

The economist on how investing in high-growth businesses could boost the UK’s productivity.

M&G is a FTSE 100 savings and investment firm that invests the savings of over five million customers in the UK. Its £5bn Catalyst strategy invests capital from UK pensions and savings into companies that are tackling some of the world’s biggest environmental and social challenges, including climate change, health issues and regional inequality.

Alexandra Ranson, director of investor relations, M&G Catalyst team: Jim, it’s just over a year since the shadow chancellor, Rachel Reeves, asked you to do a review of UK entrepreneurship for the Labour Party. What did you learn from that process?

Jim O’Neill: What really surprised me was how many very serious business people wanted to contribute. The turmoil of the Liz Truss regime at that time was probably a factor. Also, the evidence we gathered challenged some conventional thinking, such as the idea that more companies listing on the London Stock Exchange would solve the UK’s productivity and growth problems, or that we should discourage overseas investment in UK start-ups. I was very unpersuaded by that: as a country with a current account deficit, we should not be trying to limit inward investment – we need both domestic and overseas investment. And I don’t think that making it easier for lower quality businesses to list will help either. What we did home in on in the Review was getting more insurers and pension funds to invest in start-up and scale-up businesses – companies that haven’t listed on the stock exchange yet but have a lot of potential over time to grow and create good jobs.

AR: Is there political consensus now on the need for UK pension funds to invest more in high-growth businesses, as we’ve seen from Labour in its start-up review, and from the government’s recent Mansion House reforms?

JO: Yes – since the Start-up, Scale-up Review, everyone has been talking about it. It’s clear what the upside is if all of us, as pension savers, are investing in long-term assets which history has demonstrated will give better returns. And it will almost definitely help boost the long-term growth of the UK economy and help improve productivity. But there is too much talk, not enough action.

AR: In France big insurers and pension funds have made sizeable voluntary commitments to invest specifically in scale-up and tech businesses to boost the French innovation economy. Do you think the voluntary approach will work in the UK, or do we need more government intervention?

JO: The UK has a less statist business culture than France, so we may need to adapt our approach. Ultimately, our policymakers need to use the regulatory environment to alter the risk/reward decision. Since the financial crisis, insurers have been rewarded for investing in low-risk assets, which has led to a never-ending love affair with investing in gilts. We need to encourage them to take more long-term risk, in the interest of greater long-term rewards for their end customers.

AR: But as you said earlier, many overseas investors are interested in taking that risk to invest in UK growth businesses. Why isn’t the UK interested in doing this, when we have most to gain?

JO: It’s part structural, part cultural. Our institutions think it’s too difficult and too odd and doesn’t pay to invest in unlisted businesses. While for overseas investors, it’s in their DNA: whether it be a Canadian or Australian pension fund, a sovereign wealth fund, or almost any US institution, they have been doing this for years. It’s one of the reasons I am even more convinced the [state-owned] British Business Bank needs a bigger role and more independence to take a lead on investing in high-growth businesses in the UK.

AR: Has anybody broken ranks and started investing in growth businesses?

JO:  Northern local authority pension funds! Popular wisdom has it that local government pension funds aren’t much good at this kind of investing, but in fact they seem much more comfortable with taking a long-term perspective than some of the biggest institutions.

AR: You’re talking about Northern Gritstone?

JO: Yes, at Northern Gritstone, which I chair, we’re investing in start-up science and technology companies in the Manchester-Sheffield-Leeds university triangle, and much of that investment capital has come from local pension funds, alongside a cornerstone investment from M&G. With our first three investments in 2022, we’d already surpassed the total invested into all start-ups in the whole of Yorkshire and the Humber for the past two years. Whereas before Gritstone, even the University of Manchester, with its 25 Nobel prize winners and the discovery of graphene, was struggling to attract funding for its start-ups.

AR: It seems like there’s a big regional opportunity in the North, given around 85 per cent of university spin-out funding currently goes to Oxford, Cambridge and London.

JO: Looking at some of the data we’ve gathered from Gritstone, that’s very clear. If you adjust the success of university spin outs outside the Oxford-Cambridge-London triangle, relative to how much basic research funding they get, they are a lot more successful than those inside the triangle. These are great value-for-money opportunities, for investors and for the taxpayer. And with this investment, these universities are galvanised to be a lot more ambitious. It’s so, so exciting. Now we just need more of these eco-systems.

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