In my 30 years as a venture capital investor, the UK has become a world-beating hub of deeptech innovation. The university spinouts and intellectually driven companies Amadeus backs in artificial intelligence, quantum computing, chips, cyber and medtech are able to commercialise and compete as strongly as any US start-up. Venture capital makes its money by supporting start-ups. As they succeed, so do their VC backers. In the past decade, VC has beaten public markets by over 10 per cent a year in the UK’s case.
However, there remains a (British) misapprehension about how VC funds deliver this outperformance, as shown by the article, “Axing of pension performance fees sought” (Report, May 22).
UK pension funds mainly invest in public equities and bonds, where the variance of returns delivered by managers is low and fees cut into performance differences. In private markets, it’s the opposite.
The dispersion of returns is high. This was demonstrated best by the late David Swensen, creator of the Yale endowment model, when he reallocated much of its portfolio to private markets and drove extraordinary value for Yale’s beneficiaries by selecting strong private fund managers.
The performance reward built into the VC model, called “carried interest”, is a very long-term profit share, not a fee, and is made by managers from realised not imputed value. It is only paid if the manager outperforms a “hurdle rate” when the pension fund investor has made a strong cash return. Once returns are delivered, they are in the bag. They do not “go down as well as up”.
There is no way that a VC fund can contemplate an arrangement, as suggested in the article, where eventual success, resulting in carried interest, would force a breach of fee arrangements agreed with investors.
Carried interest must be excluded from the defined contribution pension fee cap. This is well understood in Australia, Canada, the US, Sweden, France and Germany, whose pension and insurance providers invest in funds backing UK innovation.
What a shame it would be if British pensioners continued to miss out on the phenomenal success being created by our nation’s entrepreneurs.
Chief Executive, Amadeus Capital Partners
London SW1, UK
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