As venture fund formation lawyers, we take a keen interest in helping our clients raise capital for their funds. If you are currently fundraising or expecting to do so soon, we have pulled together a summary of some key recent changes to the UK fundraising market, including some updates from November’s budget.
1. The government has updated its guidance to Local Government Pension Schemes (LGPSs) to increase their allocation to UK private equity (generically covering venture capital, growth equity, private debt, and private equity) from 5% to 10%. This would represent an increase in investable assets allocated to private equity by £30 billion. The guidance is not mandatory, but we expect an increase in allocation by these pension funds to private equity as these types of funds to become a more significant source of investors for UK venture funds. LGPS already invest in traditional closed-ended private equity and growth equity funds and are familiar with the investment structure, so there are few technical barriers to increasing their investment in this space. Consequently, changes could be relatively rapid.
2. The government is continuing to facilitate the investment of defined contribution schemes into private equity through the productive finance working group and other initiatives. These efforts have looked at reducing investment barriers. While investment is technically possible, in our view significant frictions remain for the investment of defined contribution schemes into private equity and growth equity, but the policy direction is positive.
Recent developments to reduce frictions are:
- Mansion House Compact. A number of leading venture funds and the British Business Bank have agreed to facilitate the investment of defined contribution schemes into venture capital funds structured as traditional limited partnerships.
- Removal of carried interest from the cost cap. Defined contribution schemes are subject to an overall fee cap, and the removal of carried interest from the cap now means that defined contribution schemes can manage the higher fees in venture funds to blend down the rate of fees across their portfolios. Prior to this change, this was not possible given the highly variable nature of carried interest.
- Consolidation of defined contribution schemes. The government has made it easier for individuals to keep their pension schemes in one place after changing employers, likely leading to a greater consolidation of asset pools. We expect this will make it easier for defined contribution schemes to manage liquidity and fee complexities that arise from investing in venture funds.
3. Other updates that are likely to generate more investment interest in venture funds are:
- Establishment of a growth fund within the British Business Bank. This is still at an early stage, and the substance of the fund is undetermined, but we expect it to have a positive impact on driving more capital into venture funds.
- Innovative finance ISAs will now be given access to long-term asset funds (LTAFs). We expect the capital available to be modest (£144 million was invested into these ISAs in tax year 2021/22), and the LTAF imposes material compliance obligations on fund managers, requiring compliance with the full provisions of the Alternative Investment Fund Managers Directive (AIFMD) and with the regulatory obligations that go with being an authorised fund manager. While positive, we expect this to be of interest mainly for larger fund managers, such as those raising funds across multiple strategies including venture that already comply with the full provisions of AIFMD. If you have questions on the LTAF, please see our publication, "The FCA’s Final Rules For LTAFs: Distribution To Mass Market Retail Investors".
- The Financial Conduct Authority will consult next spring on the Value for Money Framework. As venture funds are seen as delivering good value, we expect the framework will favour investment in the asset class.
To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.
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