Chancellor’s “Mansion House Reforms” – how might they affect UK investors?
Jeremy Hunt, the Chancellor of the Exchequer, delivered his first Mansion House speech in July 2023.
Throughout the speech, the Chancellor outlined the Government’s progress in delivering a green, technologically-advanced, globally-competitive financial services sector.
In line with this, the Chancellor presented a series of new “Mansion House Reforms” – known as the Mansion House Compact – set to enable the UK’s financial services sector to unlock capital for the most promising industries and increase returns for savers and investors, ultimately supporting growth across the wider economic landscape.
What are the Mansion House Reforms?
Firstly, the Government announced a series of measures to boost outcomes for savers and increase investment in high-growth companies through reforms to the UK’s pension market.
Secondly, the Government set out ways to incentivise companies to start up and scale up in the UK by strengthening the nation’s position as a listing destination.
And finally, the Government is working to seize future opportunities by reforming and simplifying the UK’s financial services legislation, ensuring the nation has the most growth-friendly regulation of any financial services centre – without compromising the commitment to stability and sustainability.
1. Pension reforms
Hunt announced a series of measures designed to encourage pension investment into more private companies whilst simultaneously increasing returns for investors.
An agreement between nine of the UK’s largest Defined Contribution (DC) pension providers was outlined (representing about two-thirds of the UK’s entire defined contribution workplace market), with the providers committing to allocate at least 5% of assets in their default funds to unlisted companies, startups, and private equity by 2030.
These nine pension providers represent over £400bn in assets and, according to the Government, the Mansion House Reforms “could unlock up to £50bn of investment in high growth companies by 2030 if all UK Defined Contribution pension schemes follow suit.”
Currently, just 1% of the £4.6tn of UK pensions and insurance assets, and just 0.5% of UK defined contribution assets, are invested in unlisted UK companies. This means that UK long-term savers are not able to benefit from the potential returns of growth capital, and UK-based high-growth businesses struggle to obtain the funding they need to reach their potential. In fact, Innovate Finance has estimated a £15bn gap in growth capital requirements in the UK.
The Mansion House Reforms aim to encourage pension funds to diversify further and take advantage of the higher return potential often offered by private capital.
2. Strengthening the UK as a listing destination
The London Stock Exchange (LSE) recently announced the proposed launch of its “intermittent trading venue”, a private exchange that will allow companies to access public capital without having to list. The exchange is expected to open before the end of 2024 and will be the first of its kind globally.
These measures highlight the continued efforts to make the UK a more competitive and attractive venue for growth companies to start up, develop, and then go public.
3. Simplifying financial legislation
The Chancellor also committed to creating a more effective and agile framework that allows companies to raise larger sums from investors more quickly by reducing the circumstances which require the publication of a prospectus.
This would benefit capital-hungry growth companies looking to access the markets again post-IPO to fund their growth strategies.
Some of the key reforms being proposed are:
- A new framework governing when a prospectus needs to be produced.
- Enable listed companies to tap back into the markets more quickly and with less cost than at present – which is one of the current drawbacks of the UK regime compared to the US.
The FCA is currently engaging with market participants on the new rules listed above ahead of publishing an autumn feedback summary this year and a formal consultation in early 2024, with the rules expected to come into effect in 2025.
What impact might this have on investors?
The UK’s pension market, worth over £2.5tn, is the largest in Europe. However, UK pension investment returns have been lagging behind those from elsewhere in the world.
Part of the reason for this is that UK institutional investors are not investing as much in high-growth companies as their international counterparts.
To put this into context, UK pension schemes currently invest under 1% in unlisted equity. This compares to between 5 and 6% in Australia and 11% in the US (public pension funds).
In the US, pension funds’ allocations to private equity have produced almost twice the investment gains of public equities in the 22 years to June 2022.
Whether or not the reforms will help secure better outcomes for pension investors – as the Chancellor hopes – remains to be seen.
Potential benefits for VCT, EIS, and SEIS investors
The Mansion House Reforms could also have less immediate but nonetheless far-reaching implications for Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trust (VCT) investors.
The latest official records (from the 2021/22 tax year) show these schemes channelled just shy of £6bn through to thousands of young and entrepreneurial companies. They are an established and hugely valuable source of support to early-stage startups and scaleups in the UK.
The Chancellor has previously recognised the role of these venture capital schemes “in removing obstacles which prevent the UK’s young, innovative and high-risk companies accessing the finance they need to grow.” Indeed, over the past decade, the UK has become home to Europe’s largest life science sector, Europe’s largest technology sector, its biggest film and TV sector, and its second-largest clean energy sector.
It is not unusual for companies operating in these sectors to need more capital over a longer period than VCTs and S/EIS are allowed to offer. Once the tax incentives run out, the number of potential investors shrinks significantly, leaving many young companies struggling to fund their next stage of growth.
Indeed, a 2020 report from the Scale Up Institute and Innovate Finance found the UK was facing a £15bn growth capital gap that was stifling the technology sector’s ability to grow.
The injection of fresh funds encouraged by the Mansion House Reforms could provide much-needed support for young British businesses to help them continue on their growth path.
In turn, this could translate into enhanced returns for early-stage investors.
“Unlock better returns for savers and more growth capital for businesses”
These reforms could provide much-needed support for young British businesses and help them continue to grow. This, in turn, could translate into enhanced returns for early-stage investors, such as those who invest via the EIS, SEIS, and VCTs.
Moreover, the Mansion House Reforms could potentially make it easier for these businesses and investors to achieve an exit.
Once an institutional investor comes in – the likes of the pension providers that have committed to the “compact” – it could present an opportunity for early-stage investors to realise their investment.
At the same time, the Mansion House Reforms have promised several changes that should make it easier for the most ambitious companies to list on the main stock market and raise larger sums from investors more quickly. This, too, could make it easier for early-stage investors to realise their investments.
Overall, these reforms are likely to be positive for VCT, EIS, and SEIS investors – it is encouraging that the Government is now talking so clearly about the opportunity associated with boosting private capital.
Embracing opportunity: a promising future for UK investors
The unveiling of the Mansion House Reforms signals a pivotal moment for the UK's financial landscape and its investors. These reforms, encapsulated in the Mansion House Compact, hold the promise of reshaping the investment climate in the country.
By bolstering pension investment in high-growth companies, the UK aims to bridge the gap that has hindered its pension market from achieving returns on par with global counterparts.
Equally significant, the move to establish a private exchange for intermittent trading enhances the UK's allure as a hub for ambitious startups seeking public capital without immediate listing requirements. Furthermore, streamlining financial legislation facilitates swift and cost-effective market access for growth companies.
Overall, the Mansion House Reforms signal a forward-looking commitment by the UK government to unlock better returns for savers and foster a vibrant ecosystem that empowers investors and entrepreneurs alike, underlining the country's dedication to growth, innovation, and financial prosperity. If delivered right, these practical steps could refocus finance and related regulation in the UK for the benefit of all stakeholders.