Recent Updates in the UK Venture Fundraising Landscape

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 expect to do so soon, we have pulled together a summary of some key recent changes to the UK fundraising market.

UK Chancellor of the Exchequer Rachel Reeves recently called on pension schemes to “learn the lessons from the Canadian model and fire up the UK economy,” in particular urging pension schemes to consolidate into larger funds, which should facilitate investment into infrastructure and high-growth businesses (e.g., venture).

This is a helpful policy indication from the new Labour government that it will seek to continue the policies of previous governments to facilitate the investment of pension capital into venture funds, building on prior announcements in the King’s Speech, which were covered in our recent briefing.

Previous changes included:

• Implementing a change in the guidance to Local Government Pension Schemes (LGPSs) to consolidate into one of the eight pools (such as Border to Coast Pensions Partnership) by March 2025, which should help drive consolidation and investment into venture funds.
• Implementing a change in the guidance to 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. 
• Facilitating the investment of defined contribution schemes into private equity through the productive finance working group and other initiatives. These efforts have sought to reduce investment barriers. While investment is technically possible, in our view there remain significant frictions for the investment of defined contribution schemes into private equity and growth equity.

Relatively 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. 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. This previously 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.

Other changes likely to generate more interest in investment in venture funds are:

• The Financial Conduct Authority is currently consulting on the Value for Money Framework. Because venture funds are seen as delivering good value, we expect the framework will favour investment in the asset class. The current proposal envisages a traffic light system that grades funds by their value for money.
• Innovative Finance ISAs have been 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. Also, 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 complies with the full provisions of AIFMD. If you have questions on the LTAF, please see this article and related publications here for more details.

To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.