It's time for a 10x UK sovereign wealth fund

By Daniel Lanyon on Tuesday 10 March 2020

Alternative LendingDigital BankingSavings and Investment

Tax-payer money may be well spent on restoring confidence, creating jobs and backing new ideas during a period of great uncertainty and change.

It's time for a 10x UK sovereign wealth fund
Image source: Photo by Andrea Piacquadio from Pexels

Originally published in The AltFi Weekly Newsletter, for more like this sign-up now.

For many (but by no means all) fintech founders, venture capitalists and financial journalists the current financial turmoil will represent the first proper bear market or recession that has occurred in their careers. Should yesterday's oil-price crash and subsequent market-wide capitulation lead to further contagion we could be in for a rough year or more. 

How long and how deep weakness in the global economy lasts or how quickly confidence can be restored is hard to gauge but the oil price crash and rapid sell-off in the FTSE 100, as well as markets around the world, is a highly unusual event. 

It was the worst day in stock markets since the financial crisis of 2008/9 and ended with an important European economy ordering its citizens to follow a coronavirus lockdown while supermarkets across the UK moved to stop a loo-roll-panic-buying-spree. Surreal stuff!

How Rishi Sunak responds on Wednesday in his first Budget as Chancellor is critical to how all of this plays out for business, markets and the UK economy's brightest spot: fintech. However, Mr Sunak will unlikely to be able to quickly change the budding realities owing to the spread of the coronavirus and the now unexpected consequences occurring day-by-day. 

That will take some time but it will likely be months not years. Some kind of 2008-era mega stimulus of the economy might just need to be on the cards, however.  With a starting point of very low interest rates, something different should be at least partly considered by the Chancellor, the Treasury and the Bank of England.

Perhaps, in a somewhat contrarian way, now might be a good time to talk about a sovereign wealth fund for the UK. Since 2014 the British Business Bank (actually not a bank but more of a fund in case you wondered), has been investing money from taxpayers into debt and equity in a bid to boost the economy to the tune of c.£3bn.  

This has taken the form of funding loans via the likes of Funding Circle's platform to help SMEs with liquidity as well as taking punchy investments, via British Patient Capital, into venture capitalists such as Draper Esprit. You may not know it but as a UK citizen, you own a stake in firms such as Revolut. 

Now is maybe the time to massively ramp up the fire-power - on the equity side - of the BBB or another organisation, perhaps by a factor of, say, 10, and formalise the holdings into a UK sovereign wealth fund aimed at long term returns in disruptive industries. Perhaps one day it could even help with the UK's ballooning bills for adult social care, the NHS and student debt?

Yes, the UK has its own existing national debt, and lots of it, and therefore funding investment into high-risk companies may seem insane for some fiscal hawks. 

But, let's look at the benefits. London and the UK have hugely benefited from the development of fintech, and other venture-funded disruptive industries, which now employ large numbers of people, provide fantastic services and encourage further inward investment from abroad. Fintech is not just something known to a few insiders but something that has made a big effect on the wider economy and provided many businesses and consumers with cheaper, better or easier access to core financial services.

Maintaining the current ecosystems within innovative industries, and developing new ones, is hugely beneficial for confidence and jobs. It helps clusters and ecosystems develop within short periods of time. 

Artificial intelligence, quantum computing, automation and fintech are of course buzzwords but hugely important long term secular trends too. There is every reason to expect new ones too. Good governance and sensible investment mandates for beneficiaries of future sovereign wealth cash may also be useful in bringing about innovation to much-needed areas such as climate change, clean energy, human longevity and gene sequencing-led approaches to epidemiology. 

When coronavirus subsides, which it will, the FTSE 100 - stuffed with oil majors and incumbent banks will likely rally but decades-long growth stories will still likely come from start-ups and founders currently hatching their plans in musty basements. Tax-payer money may be well spent on restoring confidence, creating jobs and backing these new ideas during a period of great uncertainty and change.

Ok, yes - the idea is half-baked and I am sure there are risks to 'start-up QE' but today's challenges may just also be the key to unlock tomorrow's opportunities and make some long term returns on the way.

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