De-risking UK pension funds' investment in fintech

In a recent statement the UK’s chancellor, Jeremy Hunt, announced that UK pension funds would be required to invest 5% of their fire power in UK start-ups. He hopes to emulate the success of changes in Canada’s investment rules that have made their pension funds powerhouses of investment across the world and generated better returns for the pensioners they serve.

Following this announcement, the Fintech community’s collective ears pricked up at the thought of another pool of funds it can tap. But if you’re a UK pension fund used to investing in boring but predictable opportunities that generate predictable investment returns, how should you choose targets in the fintech and payments space that will generate a return of any size?

We know that far more money is lost, or still pending meaningful exists, in the sector than has ever been made as is the nature of a pioneering market that is seeking to disrupt established ways of doing things. However, that makes investment by pension companies a challenge. Backing winners in a market that produces huge successes, but also massive losers is something that long-established fintech investors struggle to do.

Pension funds must also place large bets. They cannot generate the returns they need on companies that cannot scale and generate very significant returns. The cost of finding and nurturing a portfolio of small investments would make its costs much higher and therefore less likely to generate the returns required.

The likely outcome is that pension funds will follow the herd and follow other investors rather than taking an independent view of the opportunities that are out there. This may appear to be a low-risk approach.  However, some of the biggest losses have been made by the largest funds. Investors in Railsr and Wirecard can attest to that. These major players are backing multiple bets in a portfolio approach that means that losses in one deal are offset by the gains made in other parts of the portfolio. Unless the pension funds can take a similar approach, a strategy of following others into the market could lead to significant losses.

The UK is clearly a market leader in financial services and blockchain technology (fintech) and applications.  This leadership has already led to market-leading investments, and likely many more to come.  We applaud the government initiatives to allocate more to alternative investments. 

There is an opportunity for the UK pension funds to make smart investments in businesses that can scale. The characteristics of a successful start-up business are largely known and the expertise to assess them exists. It may not sit inside pension funds, but it is available from Witstock, and similar organisations operating in this space. Of course, the one aspect that can’t be assessed in any venture is how lucky the team behind it are. The investor that can measure that trait will make unimagined returns.