FST JOURNAL

Summary:

• The global race for capital is going to get fiercer.
• The UK’s institutional investor market is not sufficient alone for our requirements for capital. We need to build up our domestic institutional resources as well as attracting international capital.
• There are reasons to be optimistic, with several global funds setting up UK presences since 2020. This will bring more capital and liquidity to the market.
• International capital will complement the UK’s Mansion House Reforms, which will unlock more investment for the UK innovation ecosystem.

We often hear a lot of people talk about Big Bang moments in history, but I think they miss out one of the first ones, which happened here in 1852. This was the creation of the first the world's first modern patent office which ushered in (in the 1850s) the first wave of international foreign investment. We had Siemens, Colt and Goodyear setting up in the UK. It is proof that as a nation, we've never shied away from exposing British industries to the rigours of international competition. 

I work for the Department of Business and Trade and my job is very much about bringing skills and capital into the UK. As part of my role heading the Investor Relations team, I oversee our relationships with the international capital markets. I want to focus on how we're bringing global capital into the UK and making our innovation ambitions a reality. 

Fierce race for global capital 

My first observation is that the global race for capital is fierce and only going to get fiercer. The estimates of capital required to put us on a pathway to Net Zero are daunting and will stretch the capacity of the global capital funding market. 

Geopolitical factors like the pursuit of Net Zero, regulation of AI, supply chain interruptions and more, are all creating a trend towards a more directive role for global governments. We have seen this with the introduction of the Inflation Reduction Act in the US and parallel initiatives in the EU and other nations. In that context, we as government and industry are going to need to get much better at collaborating if we're going to get the UK's message across. 

Global capital markets

In the medium term, things are looking fairly positive for global capital markets. Many of our source markets of capital, which come into the UK, are experiencing booms in their pension markets. For example, the Australian pension funds are forecast to double in size over the next 10 years because of member contributions and the performance of their underlying asset base. At the same time, those pension funds have less places to invest, because many of them are withdrawing or changing their allocations to emerging markets. All things being equal, the size of the pie and share of the pie for the UK should increase, which means more players in the UK, more liquidity in the UK, more money coming into the listing system and more money coming into the VC system. However, international capital comes with challenges – these are evident in the real estate market, where international capital is bias towards prime locations. An important part of Levelling Up is broadening the appetite of global capital for other regions and sectors where liquidity is lower.

To address these challenges, we should be creating the conditions for globally mobile capital to participate in the UK. A good example of that is happening now- at the Prime Minister's lead- is the UK being a regulation setter. At the AI summit at Bletchley, the UK was able to bring together actors from around the world. Even those who aren't necessarily like-minded were able to come and set the momentum going for global agreements on AI. That's not the only place that we're trying to set the standards for regulation. We're doing it in areas like critical minerals, fusion energy, SMRs and quantum. This shows leadership for the UK, but it also shows the benefits of being a regulation setter, rather than a regulation taker. 

We also need to take the UK message out to the global capital markets in a creative way. We’re working with several Canadian, Australian and Asian Funds which are opening in the UK. We’ve seen many of the largest VC funds open in the UK in the last several years, bringing steadily more capital and investment skills to bear in the UK.

Spin-out Ecosystem

The rejoining of Horizon has attracted much coverage, but I’d also like point out the changes underway in our start-up ecosystem. There has been a revolution in the way that universities are approaching technology transfer. Equity expectations in line with global peer universities will help encourage more spinouts, bolstering the system further. The more that our universities seek to dominate a global niche, the more they'll be able to spin out firms who in turn, can dominate their global niches and grow.