S&S submits response to HMG's consultation on the LIFTS initiative

On 28 April 2023, Simmons submitted a response to the Request for Feedback on the Long-term Investment for Technology and Science (LIFTS) initiative, published by the Dept for Business and Trade and HM Treasury on 15 March 2023. Our response can be found here.

What is the LIFTS initiative?

The key goal of the LIFTS initiative (which arose from HMG’s 2017 Patient Capital Review) is to “crowd-in investment from institutional investors, particularly defined contribution (DC) pension funds, to the UK’s most innovative science and technology companies”.

The aim is to achieve this objective by:

• unlocking UK institutional investment;
• catalysing investment into UK science and technology; and
• stimulating the UK Venture Capital ecosystem.

HMG will commit an initial amount of up to £250 million to provide financial support to new investment vehicles or approaches that will achieve the LIFTS objectives and deliver Value for Money (VFM).

What does the Request for Feedback cover?

The Request for Feedback sets out four financial or non-financial forms of support that HMG would potentially be willing to offer and seeks industry views on these.

The options are:

1. Investment collaboration and information exchange;

2. Pari passu co-investment;

3. Co-investment with capped returns for government; and

4. Management fee offset mechanism.

What do we think?

Request for feedback here.

Among other things, we would make the following points in respect of HMG’s proposals:

• as an overarching point, the key to the LIFTS initiative being attractive for DC trustees will be less to do with how the vehicle is structured and more to do with whether the investment return (net of fees) is commercially compelling when assessed against other potential investments.
• Option 1 - a co-investment arrangement may be difficult to achieve effectively given regulatory constraints and the arrangement may well not deliver sufficient certainty of execution or access to the most diverse set of investment opportunities.
• Options 2 and 3 – these are similar in nature and have the advantage of building on existing British Patient Capital activities. If the LIFTS co-investment capital were to be available only in certain specified circumstances, it may be that this would represent an efficient way of motivating the investment management community to seek out additional capital from the relevant sources on behalf of BPC.
• Option 4 – we regard this option as potentially less effective in terms of achieving the desired objective. In the context of DC pension schemes, recent reforms to the charge cap will, we believe, allow product providers to create products with attractive fee propositions, which also deliver superior alignment of interests.
• a requirement to invest at least 50% of the proposed fund or structure into qualifying investments would represent a substantial proportion of the fund’s/structure’s capital although it aligns with the FCA’s approach on content requirements for an LTAF. If the intention is to catalyse investment via (open-ended) LTAF structures, then this alignment would seem sensible but the percentage could be higher if it is envisaged that more traditional closed-end fund structures could be employed.
• the proposed definition of ‘qualifying investments’ (to paraphrase, the company must (i) be incorporated in the UK with significant UK operations, (ii) spend 10% of the total operational cost base on R&D either as an average over three years or at least 15% in one of the past three years, (iii) develop defensible intellectual property in the UK and (iv) intend that at least 20% or more employees will carry out research for at least three years from the date of investment) gets our broad support.

However, it is unclear whether the tests capture the overall group and not just a specific company in the group and it would be helpful for there to be a time horizon included regarding the “defensible intellectual property” criterion.

What happens next?

A summary of responses and a LIFTS call for Proposals will be published in May 2023, with a closing date for proposals at the end of July 2023.

Submitted proposals will be assessed from August to October 2023 and those which have been successful will be announced in November 2023.