Railpen’s Anna Rule explains how the industry-wide pension scheme and other institutions plan to invest in UK scale-up businesses following the announcement of a dedicated fund backed by the British Business Bank.
Innovation runs deep through the UK. Our world-class universities generate the ideas, talent and research that can create the global businesses of tomorrow. Yet one obstacle has consistently held back many high-growth companies – access to the long-term, patient capital that is needed to scale domestically.
Railpen, which manages around £36bn in assets on behalf of more than 350,000 members, is proud to be one of the driving forces in establishing a new £1bn-plus Scale-up Fund, supported by other pension funds and the UK government through the British Business Bank and the Office for Investment.
Although the initiative is still being finalised, months of work have already gone into aligning objectives, identifying challenges and designing a structure that can achieve its ambitions without compromising either pension fund members’ interests or, from the government’s perspective, value for taxpayers.
Railpen has been advocating for a dedicated Scale-up Fund since last year – including in this column.
For Railpen and other long-term investors, investing in high-growth companies offers an attractive combination of return potential, liquidity characteristics, and portfolio diversification benefits.
Key characteristics: returns, illiquidity, resilience
Our primary responsibility is to deliver strong retirement outcomes for our members. Any allocation to innovation, whether through venture capital, growth equity, or broader private market strategies, must demonstrate the potential to enhance portfolio performance on a risk-adjusted basis.
The UK evidence is compelling. Since 2006, UK private capital has delivered annual returns around 55% higher than the FTSE All Share, according to UK Private Capital (formerly the BVCA).
Private markets are inherently less liquid than their public markets. For many investors, capital can remain committed until an exit event such as an acquisition or public listing.
However, for long-term investors with liabilities measured in decades, such as Railpen, the illiquidity can be an advantage. It aligns with long-term obligations while offering the potential for an illiquidity premium that compensates investors for reduced access to capital.
“A well-designed innovation ecosystem allows each participant to fulfil its core purpose without compromise… The goal is not to trade off one objective against another, but to create conditions in which all can succeed together.”
Investments in scaling businesses should be viewed within the context of a broader portfolio. Because their performance drivers are often distinct from those affecting public markets, these investments can provide diversification benefits. Exposure to high-growth companies can help build portfolio resilience by reducing reliance on traditional market factors and improving risk-adjusted outcomes for members over time.
The search for scale-up potential
The case for pension fund investment in this asset class is compelling, but success is not simply a matter of allocating more capital. Not every opportunity is equal.
Long-term investors like pension funds must focus on identifying and supporting the right companies. By building a well-disciplined, well-connected ecosystem, it becomes easier to identify, finance and nurture high-growth businesses with genuine long-term potential.
Fast-growing companies require support at multiple stages of development. A company may begin in a university’s research laboratory, secure venture funding, pilot products with early customers, attract institutional investors, expand internationally and ultimately list on public markets. Progress depends not on any single funding round or decision, but on a connected ecosystem that functions effectively at every stage.
A well-designed innovation ecosystem allows each participant to fulfil its core purpose without compromise. Pension funds can meet their fiduciary obligations while investing in growth opportunities. Governments can support innovation and procure technologies that deliver value for taxpayers. Universities can continue developing world-leading research and talent. Businesses can innovate, compete and expand.
The goal is not to trade off one objective against another, but to create conditions in which all can succeed together.
Many founders possess exceptional ideas, but tend to have limited experience of governance, reporting requirements, or institutional investor expectations. Pension funds such as Railpen can provide more capital, and as long-term partners, offer stewardship, experience and strategic support that help businesses mature and grow sustainably.
The creation of a £1bn-plus Scale-up Fund backed by the British Business Bank and other pension funds is exactly the kind of bold collaboration needed to accelerate the UK’s innovation economy – and something Railpen has actively been championing for a while.
Railpen has a long history of investing in high-growth UK companies on behalf of our members. We have seen first-hand how patient, long-term capital can transform innovation into lasting value for our members, for businesses, and for the wider economy.
Anna Rule is director of private markets and real assets investments at Railpen.
