What does the new Labour government mean for Venture Capital?

In its “Start-Up, Scale-Up” report published last year, Labour outlined its ambition to make Britain the best place to start, and to grow, a business and detailed recommendations to:

• Unlock institutional investment;
• Transform the British Business Bank;
• Translate word-leading research into growth;
• Make public procurement work for startups; and
• Incentivise investment and entrepreneurship.

These recommendations and Labour’s election manifesto set out a clear roadmap highlighting Labour’s intentions to improve the landscape for founders and investors. Key policy priorities include increasing public investment, streamlining approvals for new technologies and elevating the UK’s technology landscape.

Institutional Investment

We can expect some policy continuity in relation to institutional investment. Labour has indicated that it will maintain and build on the “Mansion House Compact”, a Conservative policy aimed at unlocking capital in the UK’s most promising industries, which saw the UK’s largest defined contribution pension providers commit to allocating 5% of their assets to unlisted securities by 2030.

Pension funds make up a much smaller proportion of venture capital investment in the UK than their international counterparts and Labour aims to increase this type of investment in UK markets by introducing reforms to ensure that workplace pension schemes “take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC”.

This has the potential to benefit the venture community through de-risked investment portfolios, and streamlined investment in UK businesses, which in turn will encourage larger pension pots for savers.

National Wealth Fund and the British Business Bank

On 9 July 2024, Labour announced plans to align the UK Infrastructure Bank and the British Business Bank under a new National Wealth Fund (NWF) to invest in critical industries. 

£7.3bn of additional funding will be allocated through the UK Infrastructure Bank to accelerate investments across priority sectors whilst catalysing the private sector.

The British Business Bank, which supports SMEs to grow by improving their access to finance, will be reformed “to ensure it can mobilise the UK’s deep pools of institutional capital by harnessing its pipeline of investments and dominant position as the UK’s largest venture capital investor”.  It remains unclear as to what these reforms will entail. 

This funding boost is designed to catalyse the private sector to invest up to £3 for every £1 of public funding. Ed Miliband, Secretary of State for Energy Security and Net Zero hopes that this investment strategy will revolutionise the UK’s energy sector and economy by creating thousands of clean energy jobs and boosting energy independence.  

Sceptics have questioned whether the NWF’s ambitions are realistic, pointing to the government’s patchy track record in picking “winners”. A recent example of this is Rishi Sunak’s “Future Fund” set up during the pandemic, which is estimated to have lost £300 million so far of the £1.4 billion it injected into early-stage companies. Some consolation can be found in the fact that it will be the UK Infrastructure Bank, which is experienced at conducting disciplined risk assessments, will be selecting the investees. While the ultimate aim of the NWF is to generate a return for taxpayers and co-investors, there is no guarantee that the investment will be realised.

Great British Energy

Domestic energy production is a key priority and Labour’s vehicle of choice to achieve this a new publicly owned company,  Great British Energy, to be capitalised with £8.3 billion over five years. Great British Energy will invest in and scale new technologies by partnering with existing market players to accelerate the deployment of renewable technologies to meet the UK’s ambitious net-zero timelines.

Tax on Carried Interest

Chancellor Rachel Reeve’s proposals for tax on carried interest have caused a stir in the private equity sector, as Labour wants to “close the loophole” that allows private equity executives to pay capital gains tax on the portion of the profits made by made by their investments rather than paying higher rate income tax. Opposition to this proposal eased somewhat after the Chancellor clarified that income tax would only apply if the fund managers had not invested their own capital.

Start-ups and Spin-outs

Schemes such as Venture Capital Trusts, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are vital for incentivising investment and entrepreneurship by offering tax reliefs tor investing in early-stage companies. The previous Conservative government confirmed that the sunset clauses for these schemes would be extended to 2035. The Labour manifesto is silent on treatment of these schemes, however Labour’s Start-Up, Scale-Up report advocates for these systems to be maintained to ensure that appropriate incentives are being provided. This also recommends a review of the limits on fundraising; investor-side caps; qualifying periods; and excluded innovative sectors.

The UK has yet to fully capitalise on its world leading universities and academic output and lags behind in the commercialisation of spin-outs and scale-ups. The Start-Up, Scale-Up report also highlights the need for the UK need to translate world-leading research into growth and reduce the barriers that prevent businesses from scaling up.  

This report proposes accelerating innovation from universities and recommends that Labour should:

• publish annual data on university spin-outs, providing transparency for founders who face information asymmetry during negotiations;
• require universities to offer a founder track option where the university takes less than 10% of shares;
• incentivise entrepreneurship by retaining and improving SEIS, EIS and Venture Capital Trusts; improving R&D tax credits; and modernising business rates and reviewing public equity markets; and
• focus on tackling the underinvestment in start-ups with women and ethnic minority founders.

Labour’s manifesto promises to work with universities to support spin-outs, to ensure that start-ups have access to funding and to simplify the procurement process. Specific steps (such as the recommendations above) to deliver these pledges have yet to be outlined, but Labour has said it will scrap short funding cycles for key R&D institutions in favour of ten-year budgets that allow for meaningful partnerships.

Tech Industry

The tech sector is dealing with a number of challenges simultaneously, including talent shortages and a lack of local investment. Brexit also caused the industry to miss out on two years of Horizon membership, the EU’s key funding project for research and innovation (although the UK joined the program as an “associated country” at the start of 2024). Despite these hurdles, the UK tech sector has remained remarkably resilient. It has retained its place as number one in Europe and number three in the world in terms of venture capital funding raised and with the UK tech industry reaching a combined market value of over $1 trillion. Labour has promised to “supercharge” the industry by removing planning barriers to building large data centres and improving procurement processes. Labour has clearly prioritised making the UK a leader in AI but will face difficult decisions in balancing ambitious energy targets and protecting the green belt against this push to develop digital infrastructure.

Labour’s manifesto also pledges to “ensure the safe development and use of artificial intelligence (AI) models by introducing binding regulation” for the handful of companies developing the most powerful AI models, but they have not yet revealed their overall strategy on AI regulation. In the King’s Speech on Wednesday 17 July, it was confirmed that the government intends to “seek to establish the appropriate legislation to place requirements on those working to develop the most powerful artificial intelligence models”.  This diverges from the approach taken by Rishi Sunak’s Conservative government, which avoided any stringent legislation in the short-term. Further information can be found in our article, ‘Labour’s plans for AI regulation in the King’s speech.’ Regulatory changes may impact levels of investment in this space as investors navigate divergent approaches.

Conclusions

Although the outcome and detail of Labour’s nascent policies in unclear, there is a clear political emphasis on directing public investment to green energy and infrastructure projects and encouraging the private sector to follow suit.

The Chancellor hopes that her commitments to spending and increasing the ease of doing business will provide investors with the confidence and policy certainty required to attract long term investment. Coupled with commitments to improving trade relations with the European Union, the venture community could feel the benefits of increased investor confidence in the direction of the UK economy.