Universities target 'patient' investors to buy into innovation

The worlds of academic research and finance are increasingly merging, as “patient capitalists” look to invest in university spin-outs for social impact and returns — and some equity investors and SRI funds are taking note.

  • By Jasper Cox
  • 13 Feb 2018
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“It’s very clear to see that innovation has been the driver of much of the value in equity markets and also in private markets for at least the last decade,” said Douglas Hansen-Luke, executive chairman of Future Planet Capital (FPC), a platform for investment into university spin-outs.

These are start-ups which emerge from academic research, generally with a high level of technological specialisation, and holding intellectual property. FPC announced last week that TW & Partners, an Asian asset management firm, had signed up to be cornerstone investor in its inaugural fund, investing up to $200m. 

Hansen-Luke believes FPC could invest up $500m in new start-ups.

In the last four years around $35bn of venture capital investment has been spent commercialising intellectual property, according to Hansen-Luke’s figures.

University-affiliated incubators for spin-outs and start-ups are also reporting an increase in investor interest.

SETsquared, a collaboration between the universities of Bath, Bristol, Exeter, Southampton and Surrey, reports that its members received £90m of investment in 2015 which then rose to £167m the following year. It expects this to be around £200m for 2017.

Its firms are typically involved in science, engineering and technology — a particularly popular sector right now is deep data.

Socially responsible guns

Much of the money put into the firms comes from funds targeting socially responsible investing, working on the assumption that many of the brightest ideas coming out of universities could solve global challenges such as climate change and find cures for diseases.

Future Planet Capital, for example, has a mandate only to invest in companies with a clear link to one of the UN’s Sustainable Development Goals (SDGs).

“I think we are actually at the point where people do believe that impact is the right way to invest, and that they’re less frequently seeing a contradiction between maximising returns and investing for impact, and certainly we believe that impact drives those returns,” said Hansen-Luke.

But Hansen-Luke has what many would see as an unconventional approach to socially responsible investing; not least in the way that he sees room for smart guns in his firm’s portfolio. These are weapons with a safety mechanism preventing anyone apart from the owner using them.

“If you could do with a gun exactly as you can with an iPhone — so you can only use it with a finger print or a retina scan — then you stop unauthorised people using the weapons. Not only that: if there is a crime, then the person who is registered to that weapon can be more easily held accountable,” he said.

“That would be an example of something which we would view as actually a net improvement and therefore we might invest in it. Likewise, in the developing world, small arms proliferation is one of the biggest reasons why wars continue and if you don’t have the guns you can’t continue it.”

He also criticises conventional approaches to analysis in sustainable investing which he claims inevitably leads to bureaucracy.  

Hansen-Luke believes analysing companies at an early stage to check how beneficial they can be for society can be self-defeating. His firm will put more weight on assessing the impact at exit stage.

“We actually think the most important way to have an impact is to put your money to work,” he said. “When we exit from investments we will be doing that forensic analysis, but then you’re doing forensic analysis on reality, on something that’s actually happened.”

Taking a long-term view

While many spin-outs get snapped up by larger firms in M&A deals, others opt for IPOs. A report by the BioIndustry Association and Informa Pharma Intelligence found UK biotech firms raised £234m in IPOs last year, compared with £105m in 2016.

Two of these biotech firms which went to the Nasdaq Global Select Market last autumn emerged from universities. Nightstar Therapeutics, which was established by scientists from from Oxford and Imperial College, London, raised aggregate net proceeds of $77m in an IPO in October, valuing it at $900m.

Another company, NuCana, which uses cancer treatment medicine invented at Cardiff University, raised $114m with a valuation of $463m — it began trading at the end of September. 

Another advantage for many of these new companies is that investors are also said to be willing to be patient in their outlook.

“The fairy tales of three year returns for these sorts of investments rarely translate into reality and actually patient capital is the way forward and looking at something close to a ten year window is just realistic,” said Simon Bond, innovation director at SETsquared.

He added that although the type of businesses involved can take longer to pay investors significant returns, the intellectual property they hold can provide a bit more security compared with other start-ups.

“Rather than insightfulness and altruism and some sort of new-age awakening, it’s been a long, hard-learnt experience,” he said. “But it does leave us with a group of UK investors who are a golden asset to this country because they are patient and they understand the game.”

Of course patience might have its limits. Shares in Neil Woodford’s Patient Capital Trust — one of the best-known funds in the sector — have fallen by about 18% over the past year as two of its largest holdings suffered: biotech firm Prothena’s shares fell heavily last year, while estate agency Purplebricks has been hit by questions over its sales figures.

But the idea of patient capital ties in with new blueprints for the financial system. The UK government completed a patient capital review last year and Chancellor Philip Hammond vowed to seed a new fund from the British Business Bank with £2.5bn to help start-ups grow.

Efforts on this front are also underway in the European Union and a report was published by the high level expert group on sustainable finance at the end of January, now to be considered by the European Commission.

This report sees longer-term investment as part of its mission to make the financial system more sustainable.

“The needs of businesses for patient capital are undermined by an excessive focus on short-term price performance, particularly on listed equity and bond markets,” the report said. 

  • By Jasper Cox
  • 13 Feb 2018

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