Outlook: Venture capital

ACTUARIES ARE low profile, understated types who rarely stick their heads above the parapet to say anything publicly. So when they do, it is worth taking notice. No less than three of Britain's leading firms of consulting actuaries - Bacon & Woodrow, William M Mercer, and Watson Wyatt - have put their names to a press release saying that pension funds and life companies should raise their investment in unquoted securities.

Since institutional investors often cite "actuarial" reasons for their aversion to venture capital, this is a statement of some significance. Certainly it will be music to the ears of Gordon Brown, the Chancellor, who has been banging on ever since he entered Government about the City's failure more fully to embrace the venture capital market. According to the actuaries, there would be nothing to stop most pension and life funds substantially increasing the proportion of assets devoted to venture capital. Most pension funds have less than 1 per cent of assets in unquoted investments and in some cases it is zero. To have more, some claim, would risk breaching government rules on minimum funding. Others are concerned about the risks of holding illiquid investments.

None of these practical constraints are insuperable, the actuaries say, and some think it should be possible for most pension funds to raise their exposure to venture capital to as high as 5 per cent of assets. This would make a huge difference to the supply of such capital to enterprise.

Unfortunately for Mr Brown, the objection to venture capital goes beyond an actuarial one. The trouble is that venture capital has traditionally proved a far poorer investment than quoted equities. In part this is a chicken and egg problem. The reason there are so few promising venture capital opportunities is because Britain lacks an enterprise culture, and in part that is down to lack of risk funding. It will take more than a few actuaries to persuade the pension fund industry to change the investment habits of a lifetime, but every little helps. If it is true that we are about to enter a period of quite poor returns on traditional equities, then that in any case might drive pension funds more into the venture capital market, where as the US has shown, the rewards can be quite staggering.