What a Labour Government Means for Venture Capital in the UK

On July 4, 2024, the Labour Party won a decisive victory in the UK General Election, securing a majority of over 174 seats. This marks the first time in over 14 years that the centre-left party has returned to power. As the country begins this new chapter, it’s important to examine the potential implications of a Labour government on venture capital (VC) in the UK.

Labour’s Vision for Supporting Start-Ups and Scale-Ups

In its “Start-Up, Scale-Up” report, Labour outlined its vision to make the UK the leading hub for business creation and growth. The report highlighted several key strategies to achieve this, including:

• Unlocking institutional investment
• Transforming the British Business Bank
• Turning world-class research into commercial growth
• Making public procurement more accessible to start-ups
• Incentivising investment and entrepreneurship

These proposals, alongside Labour’s election manifesto, signal an ambitious roadmap designed to improve the business landscape for both entrepreneurs and investors. A central theme is to boost public investment, streamline approval processes for new technologies, and expand the UK’s tech sector.

Strengthening Institutional Investment

One of Labour’s main priorities is to enhance institutional investment in UK industries. Labour is expected to build on the “Mansion House Compact,” a policy initiated by the Conservatives, which encourages major pension providers to commit 5% of their assets to unlisted securities by 2030. The aim is to increase pension fund investments in UK markets by ensuring workplace pension schemes can leverage consolidation and scale to deliver better returns.

This initiative would benefit the venture capital community by de-risking investment portfolios and promoting larger pension pots for savers. By streamlining investments in UK businesses, it could lead to more capital being directed toward high-growth sectors, making it an attractive option for investors.

National Wealth Fund and British Business Bank Reforms

On July 9, 2024, Labour revealed plans to merge the UK Infrastructure Bank with the British Business Bank under a new National Wealth Fund (NWF). This fund will focus on critical industries, with an initial £7.3 billion allocated to the UK Infrastructure Bank. The goal is to leverage public money, aiming to generate £3 in private sector investment for every £1 of public funding.

While the specifics of reforms to the British Business Bank remain unclear, the initiative could revolutionise the UK’s energy sector and economy by fostering clean energy job creation and increasing energy independence. The collaboration between the UK Infrastructure Bank and the NWF could provide reassurance to investors, even as some question the ambitious goals of the NWF.

The Creation of Great British Energy

Labour’s plans for domestic energy production include the creation of a new, publicly owned entity called Great British Energy. The government intends to capitalise the company with £8.3 billion over five years, partnering with existing market players to scale renewable technologies and help the UK meet its net-zero targets.

This investment in clean energy aligns with Labour’s broader economic agenda, which aims to foster job creation and growth in sustainable sectors while supporting the transition to renewable energy.

Tax on Carried Interest

A proposal from Chancellor Rachel Reeves to tax carried interest at income tax rates has sparked concerns within the private equity sector. However, this measure will only apply to fund managers who have not invested their own capital, easing some of the resistance. The proposal indicates that Labour is seeking a more balanced tax structure for the private equity industry, aiming to ensure fairness in the taxation of profits.

Supporting Start-Ups and Spin-Outs

Labour’s support for start-ups is clear, with initiatives designed to make it easier for new businesses to access funding and scale. The government plans to continue and improve existing schemes like the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCTs), all of which provide tax relief to investors.

While Labour’s manifesto doesn’t explicitly address these schemes, the Start-Up, Scale-Up report stresses their importance and advocates for improvements. The party also seeks to commercialise university research by encouraging spin-outs and supporting entrepreneurs. Measures like publishing annual data on university spin-outs and simplifying the procurement process for start-ups show that Labour is committed to making it easier for these companies to thrive.

Enhancing the Tech Industry

The UK’s tech sector faces challenges, such as talent shortages and insufficient local investment. Despite these hurdles, the sector remains strong, leading Europe in venture capital funding and ranking third globally. Labour aims to address some of these challenges by removing barriers to building data centres and simplifying procurement processes, while also prioritising the development of AI technologies.

The party’s pledge to introduce binding regulations for AI development could impact investment levels in this sector, but it’s designed to ensure ethical and sustainable AI growth. By focusing on tech and innovation, Labour hopes to further position the UK as a global leader in the industry.

Conclusion: A Positive Outlook for Venture Capital

Labour’s policies indicate a strong commitment to boosting public investment in infrastructure and green energy, while also encouraging private sector participation. Chancellor Reeves hopes that these investments, combined with a more business-friendly environment, will attract long-term capital and drive economic growth.

The full impact of Labour’s agenda will take time to materialise, but their focus on supporting innovation and streamlining business operations presents a promising outlook for the UK’s venture capital scene. Increased public investment, along with efforts to make it easier for start-ups to access funding, will likely create a more attractive environment for investors and entrepreneurs alike.