Leandros Kalisperas, Chief Investment Officer, British Business Bank says direct investment in startups is likely to rise
British Business Bank
The U.K. innovation economy continues to attract more VC investment than its European counterparts, but there are some significant gaps in available funding, particularly between Seed and Series A and when businesses require growth capital to scale. This week, the British Business Bank (BBB) announced that it has been quietly recalibrating its own investment strategy to provide more capital for scaling companies while also “crowding in” finance from private sources, including VCs and ultimately pension funds.
Established in 2014 with a brief to support smaller businesses, the BBB effectively operates as Britain’s economic development bank. Earlier this year, under the Government’s Modern Industrial Strategy initiative, the bank was allocated £4 billion to invest in young companies working in sectors considered crucial to the future of U.K. prosperity, with a further £2.6 billion earmarked for promising startups operating in any industry.
Meanwhile, the bank has been quietly altering its modus operandi for investment. Rather than channelling money through VC funds, it has begun to step up direct investment, albeit alongside VCs. To date, it has provided £250 million in equity funding for 33 scaling companies in the tech and life sciences sectors. Moving forward, the BBB intends to step up direct investment to support companies that are, as it sees it, at the forefront of innovation and growth.
So what will this mean for the U.K.’s ecosystem. I spoke to the bank’s Chief Investment Officer, Leandros Kalisperas, to find out more.
Investment Choices
As Kalisperas acknowledges, the £250 million invested directly thus far represents just 5% of the BBB’s total commitment, so in the greater scheme of things, we are talking about relatively small sums.
However, the percentage is expected to rise once the BBB begins to deploy the capital provided to it under the Modern Industrial Strategy. “I could see up to 25% of the Industrial Strategy capital being done on a co-investment basis,” he says.
That raises questions about how a body that has previously invested through VC funds – and thus relied on fund managers to make the investment choices – will select companies to support directly. Are we looking at a situation where a state-sponsored body will begin the perilous undertaking of picking winners?
Well, it’s smore nuanced than that. Kalisperas says the BBB will look at investment selection through two lenses. First, if the bank has already invested in a business via a fund, it may be willing to provide more capital if it is needed as a top-up ahead of future rounds.
“The power law distribution suggests that the way returns are made is through breakout companies succeeding. So our first premise was to follow into later rounds some of those companies that we already see in our funds program,” he says.
Backing Research Intensive Companies
In addition, the bank will look for research-intensive companies that require capital to continue to develop their products. Typically, these will be industries such as deep-tech or life sciences. In this respect, the Bank is in a position to fill in some of the gaps in the U.K.’s investment landscape. In particular, they need time and capital to bring their products to the market.
This second lens is reflected in the investments to date. Out of the 33 deals, around half have committed cash to university spinouts working on cutting-edge technologies and solutions.
However, Kalisperas stresses that the state-funded bank won’t be allocating public funds in a vacuum. Although it will invest directly, this will be in concert with VCs. “It’s probably more accurate to call it co-investing rather than direct investing,” he says.
Crowding In Pension Fund Cash
Nevertheless, the BBB has expanded its team to ensure it has the skillsets and experience to make effective investment decisions. The driver for this has been the launch of an initiative known as the British Growth Partnership. Essentially, this will see the BBB setting up a fund that invests directly in growth-stage companies on behalf of institutional investors, such as pension funds.
“The fund will showcase the best of UK PLC and offer that as a curated product to pension funds,” says Kalisperas. “The fund will be managing third-party money, so it’s important to get it right.”
As things stand, the BBB is close to closing its first Growth Partnership fund with institutions such as NatWest Cushion, Aegon and London CIV among those who have committed capital. Under the Mansion House agreement, pension funds have committed to investing more in British companies, including scaleups. However, as Kalisperas points out, VC is an unfamiliar asset class for them and they will need time to formulate their strategies and educate themselves. In the meantime, the Growth Partnership will provide options.
All this should help fill in at least some of the gaps in the funding ecosystem. In particular, the BBB aims to use public money to crowd in private investment. That should, in turn, make life easier for growth-stage companies.