Last week, the government published its long-awaited public consultation for the Patient Capital Review. Entitled, Financing growth in innovative firms, it takes an in-depth look at the current availability of finance in the UK, the root-causes of low investment and short-termism, and proposes initiatives that could remedy the problem. The BIA will be responding and we are keen to hear your views to inform our submission.

What is the Patient Capital Review?

In November 2016, the Chancellor announced a review to “identify barriers to access to long-term finance for growing firms, supported by an advisory panel led by Sir Damon Buffini”. The public consultation was expected earlier this year but was delayed by the general election.

The review defines patient capital as: long-term investment (acknowledging that in some sectors this can be as long as 10 to 15 years), in innovative firms that are producing new to market products and run by ambitious entrepreneurs who want to build large-scale businesses. As called for in the BIA’s industrial strategy paper, the focus of the review is very much on scale-up capital as well as long-term investment.

The BIA met with the Treasury team in January to discuss the review in its early stages and hosted an open discussion event for members in April. We have also facilitated stakeholder meetings for the Treasury and Office for Life Sciences, and two BIA members are on Sir Damon’s industry advisory panel.

The scale of the challenge

The analysis in the consultation document is extensive and certainly worth reading. It estimates the gap in UK venture capital provision to be £4 billion compared to the US, meaning the challenge is to double the current total VC available. It shows that the UK matches the US for number of investments (adjusted for the size of the economy) but they are typically much smaller, especially in later funding rounds. The life sciences is highlighted as a sector that particularly struggles to attract sufficiently-sized successive funding rounds and often exits through trade sales rather than scaling-up.

A lack of critical mass in parts of the UK’s capital markets is identified as the root cause, which results in inefficient capital allocation (pages 29-34). The document also looks at the different sources of capital, which are each impeded by different barriers to investing for the long-term (pages 35-42).

Proposed solutions

The government proposes a series of initiatives that could address the challenges the report identifies:

  • A large new government-backed National Investment Fund to provide patient capital, this would replace or complement the European Investment Fund and could operate as a public-private evergreen vehicle, a fund of funds, a standalone fund of purely government money managed by the British Business Bank, or simply an increase in BBB funds distributed through existing programmes
  • Working with the Financial Conduct Authority to reduce regulatory barriers to setting up new patient capital funds (like IP Group and Touchstone), which the government believes pose specific challenges due to their atypical approach to investing
  • Encouraging pension funds to allocate a proportion of their money to patient capital (they state there are no regulatory/legal barriers to this and it is purely cultural risk aversion that could potentially be remedied through a communications exercise or similar)
  • Increasing investor capability, for example by using government funds to attract and nurture new fund managers
  • Increasing retail investment through reliefs, however the government is minded not to do this as it calculates that option 1 (a fund) is a more cost-effective means of encouraging investment. Specifically, it rules out an ISA-like vehicle to increase retail investment 

Help inform the BIA’s response

We will be responding to the consultation, expanding on the challenges that biotech companies face raising capital, commenting on the proposals and highlighting other BIA policies that could support our sector. We are keen to hear your views to inform our response, in particular:

  1. Which, if any, of the government’s proposed structures for the National Investment Fund is preferable, and what other rules should be applied to the fund to ensure it best supports the biotech sector and grows the investor base?
  2. How can the number of specialist fund managers knowledgeable in the life sciences be increased in the UK, and how can existing ones be supported to raise greater sums of capital to invest?
  3. What changes to existing schemes, especially Venture Capital Trusts, can be made to target more money into patient capital investments?
  4. How can pension and insurance funds be encouraged to invest in innovative businesses (including through intermediary investment vehicles) that are perceived to be riskier, long-term investments?
  5. Later and larger fundraises (for scale-up) are identified to be a notable UK weakness, how can this be addressed?

We are keen to hear your views on these questions and any other thoughts you have on the Patient Capital Review. Please email Martin Turner.  

Further information

The consultation document and further information can be found on the government’s website.

If you’re an investor, you can join us for a special panel event on 29 September to discuss the Patient Capital Review and other factors that will impact the growth of the UK biotech sector in the coming years. We’ll be joined by ex-science and Treasury minister Lord David Willetts to give his personal insight and experience, alongside other experts on the sector. Go to the BIA website for more information and to register.