The AltFi view on institutional capital: Pension funds should embrace fintech start-ups

Last week the UK’s fintech community ended the week under a haze of excitement as the long-awaited Kalifa review into the sector landed. 

Among its 108 pages, one of the headline recommendations was to broaden the funding sources for fintechs as they continue to scale. 

Too it mildly, fintech companies haven’t struggled for funding in recent years. True, the pandemic may have prompted a dip, but billions have flowed into the sector in the past five years. The UK alone saw $4.1bn flow in 2020, second only to the US where an admittedly far larger $22bn was invested last year.

Most of the cash, especially that from UK investors, came from venture capital funds. But very little came from some of the deepest pools of potential capital, pension funds.

There is a staggering £6trn in UK private pension schemes at present, much of it low yielding ‘safe investments’ such as corporate bonds owing to complicated rules around liability-driven investment. As a partial consequence, the UK pension shortfall has reached approximately £5trn. 

Put more simply; pensions are in dire need to grow their capital base to be able to make future payments of pensions. 

Step in fintech and other high-growth sectors that make up the world of technology-focused start-ups.

Kalifa, or rather the report he has authored, says a small portion of the UK’s pension cash could be diverted to high-growth technology opportunities like fintech.

It notes: “at present, investment into the UK fintech sector has been led by international sources of capital. An analysis of investment into UK fintech companies demonstrates that the majority of investment over the past five years has come from non-domestic capital. And these foreign investors are enjoying the proceed”.

Fintech investment has seen a 270 per cent return on average, over the past 10 years, with the largest 10 fintech companies achieving returns of 420 per cent. In comparison, the FTSE 100 is up 62 per cent over the same period.

Encouraging domestic investment and institutional capital would allow us to retain these proceeds and could go some way towards plugging the gap. 

As Tim Levene, CEO of Augmentum Fintech, the UK’s only listed fintech-specific fund, says, there is a need to encourage UK institutions, in particular pensions funds, to invest in fintech. 

“We believe there is a significant opportunity and demand for a greater pool of capital flowing into Fintech which in turn can only strengthen the UK tech ecosystem,” he said.

But what does encouragement look like?