In 2022, family offices (FOs) provided almost one-third of the capital invested in early-stage companies globally, across sectors such as software as a service (SaaS), fintech, AI and telecoms. However, 2023 saw a sharp reverse, with the total capital invested in start-ups by FOs falling by almost 45 per cent to $161.7 billion, according to a PwC report. Part of the reason is that FOs are managing risk by investing at a later stage and with other investors in club deals.
This makes sense for many FOs, but for those who can access specialist knowledge and skills in niches such as biochemistry, material sciences, physics, machine learning and data science, there is an excellent opportunity to make great investments in innovative UK companies in a less risky manner.
UK universities research real-world problems and are working on achieving net zero and protecting biodiversity, and are making advances in chemistry, biology, life sciences, robotics, quantum computing and AI – to name just a few. This work provides the foundation for the current FO investment sector profile interest.
The start-up risk for FO investors is ameliorated by initial business support and finance provided by university incubators and Innovate UK. Follow-up finance is available from British Business Bank and now UK pension funds that signed up to the Mansion House compact last year, where 11 institutions agreed to invest 5 per cent of their default funds in UK unlisted equities by 2030.
UK capital markets are becoming more founder- and early-stage-company friendly, thanks to changes recommended by the September 2024 Capital Markets of Tomorrow report and under the FCA’s new PISCES framework.
The opportunity here is for FO investors to align with the Mansion House compact institutions (who so far have only deployed £793 million out of a potential £50 billion) in co-investments and create deal terms that protect early-stage investors (who traditionally fund all the risk and lose out on most of the rewards to later-stage investors).
The key task is to use this significant source of capital to build in an institutional class of shares which cannot be diluted, and which contain levers of control that aid in the management of conflicts of interest. Institutional investors should receive accurate, timely financial information and have the ability to remove founders and the board if the business is not being run properly.
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Investors should also verify that the key intellectual property is owned by the company they have invested in, and that it is properly protected and monitored. Segregated funds should be allocated and ring-fenced for that purpose.
With these developments and considerations, the flow of FO capital into early-stage UK companies can benefit all concerned.
Rosalyn Breedy is a corporate, fund and financial services lawyer at Breedy Henderson
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