Why UK pension funds should take a closer look at the opportunities in domestic venture capital, which can drive economic growth and unlock long-term value – by Harry Raikes and Jo Bugg

Venture capital is one of the most recognized ways to gain exposure to the growth potential of private companies. Yet it remains misunderstood by many, with persistent myths that distort perception of its risks and rewards, and the benefits it can bring to the UK economy.

For many UK pension schemes this has led them to miss out on accessing the potential of some of the country’s most successful, and innovative, private businesses to unlock growth and drive long-term value.

Myth 1: Venture investing is just putting money into high-risk start-up businesses

Venture investing is about much more than simply providing capital. Success is realised through true partnership with founders, enabling the rare visionaries who can re-shape industries and societies.

Modern venture capital took shape in the 1950s, as investors backed Silicon Valley’s earliest technology companies and helped to launch the information age. Since then, it has consistently driven change, fuelling ecosystems that create jobs and accelerate progress – turning innovation into real world impact.

For investors, it offers the opportunity to tap into secular trends and emerging mega themes early, with potential to benefit from compounding of returns over time.

Myth 2: Venture capital is too risky to deliver consistent returns.

Risk is inherent in venture, but with a balanced, long-term and partnership-orientated approach, risks can be managed.Industry research supports the “power law” in venture: a small number of companies generate the vast majority of returns in a portfolio. As shown in the chart below, this creates wide dispersion, with outcomes between funds varying by up to 20 percentage points annually.

Yet this variance comes with greater potential upside. Returns have historically been skewed toward positive outcomes – and the best managers have generated consistent outperformance.

From 2009-2023, across more than 2,000 funds tracked by Schroders Capital, early-stage VC funds were nearly three times more likely than buyout funds to deliver a return multiple (TVPI) greater than 3x capital invested (13% vs 5%). While a higher proportion of venture funds returned less than 1x, the gap was far smaller (10.5% vs >6%).

Myth 3: Investors considering venture should focus only on US

The US may be the birthplace of modern venture, but innovation is now global. Today, 45% of unicorns (venture-backed start-ups valued at over $1 billion) are based outside the US.

The UK is not just following – it is Europe’s largest venture market and the third-largest worldwide, with more than 50 unicorns and clusters of world-class innovation. Ranked fifth on the Global Innovation Index, the UK is a proven leader in fintech, AI, cloud software and life sciences.

UK venture investing can help create jobs, strengthen domestic innovation, and support long-term economic growth, while capturing the return opportunities associated with global innovation trends.

Myth 4: Success in venture comes down to luck

It’s easy to assume that venture capital is a gamble. In reality, long-term success relies on discipline and process. Based on our three decades of experience, the most effective allocators know the importance of:

• Access: Only a few managers see the best opportunities.

• Experience: Essential to navigate dispersion and avoid hype.

• Perspective: A global view is vital for assessing innovation potential.

• Trust: Being a long-term partner to entrepreneurs and investors.

Far from being about luck, venture investing succeeds when these factors are applied systematically, with a focus on long-term patient investing and selecting the best managers with which to partner and invest.

Unlocking opportunities

For UK pension funds, venture capital is more than an asset class – it is a chance to participate in the next generation of global leaders while fuelling domestic growth, in line with the objectives of the Mansion House Accord. Meanwhile, new products such as long-term asset funds (LTAFs) provide an effective way to gain exposure with some flexibility on liquidity.

In a portfolio context, venture capital allocations provide access to potential outsized investment returns, produced from alpha drivers that are less correlated to public or other private market asset classes. There is a strong alignment of time horizons for pension capital and access the steeper parts of the company value creation curve.

Now is therefore a good time for investors to re-assess venture’s potential.

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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