Q100 The Chair: Good morning. Welcome to this Science and Technology Committee session. We are very pleased to have two witnesses in our first session this morning: Saul Klein, who is managing partner of Phoenix Court and a member of the Prime Minister’s Council for Science and Technology, and Sir Jonathan Symonds, chair of GSK and a member of the Capital Markets Industry Taskforce.

Gentlemen, as you know, this is an inquiry into financing and scaling UK science and technology. We are examining a lot of issues that you have tried to address through your role, Mr Klein, on the Council for Science and Technology, and your role, Sir Jonathan, on the Capital Markets Industry Taskforce. Could each of you give an opening statement setting out how you view the current situation in the UK for financing and scaling UK science and technology companies? What do you think the mood is like for investors nearly a year into the new Government? What barriers do you think are still important? Perhaps we could start with you, Mr Klein.

Saul Klein: I really appreciate the opportunity to provide some views here. As you mentioned, I wear two hats. My front-line hat is being the founder and managing partner of Phoenix Court Group, which is a venture capital firm investing from the very earliest stages all the way through to scale-up and IPO. So we have, if you like, a front-line seat at the coalface of the innovation economy, if I am not mixing too many metaphors.

My second hat is being on the Prime Minister’s Council for Science and Technology, which I have been on since 2020. Within my role there I have focused on this issue of accessing capital at scale to support the innovation economy, with advice going back to 2021. We published a letter to the Chancellor in October 2024, which was the third letter on this topic, and one of my former colleagues, Lord Stern, was very much involved in some earlier advice.

To summarise, the advice that we gave to the Chancellor in October last year is that, sadly—I say this because in the UK we are often not very happy to succeed—we are one of the world’s best innovation economies, and this is still very much the case. On a global basis, the UK is the second or third most successful innovation economy in terms of access to venture capital and the number of billion-dollar valuation companies that have been created: the so-called unicorns.

More importantly—as we noted in our advice last year—the UK has produced over 800 venture-backed companies that have generated more than £25 million in revenue. So these are not mythical beasts like unicorns; these are actual horses. We would call companies doing £25 million to £100 million in revenue colts, and those doing over £100 million in revenue thoroughbreds. The UK’s 800 colts and thoroughbreds equal those of France, Germany, Sweden and the Netherlands put together, not that we compete with our European neighbours.

So we are starting from an incredible base, not just an incredible science or technology base—which you will know about—but the base of an incredible number of investable opportunities in high-growth companies. To be fair, we have probably not done a good enough job of just stating the facts and providing the evidence that we are world leading at possibly the most important thing for an economy to be world leading at in the 21st century, which is innovation and growth. That is the good news.

The challenge is that at the scale-up stage—when companies require capital in the hundreds of millions, or billions, to achieve the kind of levels that we have seen primarily in the Bay Area and Silicon Valley—we have not seen enough domestic capital coming in, although there is capital available and there is this wealth of investment opportunities.

To be fair, we have seen enormous progress following the advice we gave in 2021 around pension fund reform. We are now on Mansion House Compact II and meaningful pension fund reform and consolidation. But the reality is that we have almost £6 trillion—of which, Sir Nigel Wilson would point out, nearly £700 billion is sitting in cash ISAs; the equivalent of putting your money under your bed—which is not going into the innovation economy.

What does that mean and why does that matter? To give you the analogy that I shared in 2021 with the Prime Minister and the Chancellor, we are exceptionally good at inventing engines in this country. Think Rolls-Royce. We can put the engine on a plane and we can put the plane on the runway, but when it is time for the plane to fly around the world and create real value, we are prepared to pay for only 20% of the fuel.

What does that mean? It means that 80% of the economic value goes to a teacher in Ontario, the Singapore metro system, the Saudi royal family, nurses in Denmark and all the other non-domestic sources of capital that are delighted to invest in our innovation economy. To me, the fundamental question is: do we as the UK want to benefit from our economic growth and innovation, and if so how much?

Sir Jonathan Symonds: I will say it differently, but I am going to say exactly what Saul has made very clear about the nature of the problem. I am here with three hats. One is obviously GSK, a major investor in the UK. Along with AstraZeneca, we contribute maybe £5 million per annum into UK science. If you look at some of the major university systems around the country, they are heavily supported by us. If we are trying to look for a solution to this problem, having two very big, globally scaled investors in the country is a very good place to start. Many countries that Saul has talked about do not have the size of those domestic engines.

The second hat is that Professor Sir John Bell—who you have already seen—and I were tasked with writing a life sciences strategy in 2021. A major conclusion that we had then was that we were short not of innovation but of scale-up capital. Despite having one of the most attractive life science sectors in the world and one of the most scaled financial services communities in the world, they acted—and to a degree still act—as parallel universes with virtually no interaction between them. John and I had a very clear conclusion that we had to move to UK participation in the growth and innovation opportunities that we have in this country.

The third hat really came as a result of that. John and I were pushing this issue hard at the same time as Julia Hoggett and others were pursuing the revitalisation of the UK equity markets, so CMIT and the Life Sciences Vision that we produced came together at that point. In terms of what CMIT was trying to do, we broke the problem into four pieces. The pieces were different for different sectors, but they were start, grow, list and stay in the UK.

As Saul has so very clearly said, we do not have a problem with creativity and innovation. Some of the best science in the world is done in this country, even if we believe that the potential is even greater than where we are today. I spent yesterday in the vicinity of Cambridge University and it is spectacular, but you could do the same in Birmingham, Manchester, Oxford and the rest of the country.

The real problem is what happens next. When companies have shown themselves to have high potential and capital needs, if the UK does not participate in the early stage it loses the right to participate in the later stage. When the capital comes—exactly as Saul has said—it comes from the US in large quantities. Every single VC in the life sciences sector is in the UK and actively investing. It comes from the Middle East and pension funds around the world, but not ours. Until we recognise the opportunity on our doorstep and deploy our capital, we will lose the right to determine where those companies subsequently go.

The third stage was listing. CMIT has been very successful in trying to neutralise the perspective that the UK capital markets were more bureaucratic and regulated. With the review of the listing rules, some advances on governance and this morning in the stakeholder review, the Financial Reporting Council has made some big steps in simplifying the creation of more market participation. UK capital markets genuinely are no longer at a regulatory disadvantage. But if we do not have vibrant markets with high liquidity and research capabilities that can properly price and value these companies, the markets will always be more attractive in the US where the liquidity, volume and potential for price discovery are much higher.

In terms of scale-up, we still have challenges, and in terms of staying in the UK, we need more liquidity. This Government and the previous Government have tackled this problem really seriously. The pension reforms that were announced last week—which the previous Government had started—are serious attempts to release the £6 trillion capital in this country.

Notwithstanding Mansion House I and II, you can point to a lot of regulatory reforms and discussion about consolidation, and no capital has flowed. For me, that is the measure of the success of this. It is not whether the regulatory passage is moving smoothly through; it is capital flow we need now. It is providing the UK institutions—whose appetite is higher now than it was 12 months ago and a lot higher than it was 24 months ago—ways to efficiently deploy that capital into UK start-ups and scale-ups. Then when the question comes, “Where do we list?”, you do not have to have that conversation because you have British investors and board members and an organisation here that will say, “Of course we’re going to stay in this country because we’re not finished”. For me, it remains as urgent today as it was in 2021, and until we see the flow, we cannot congratulate ourselves on any pension reform or regulatory progress that we are making; it is flow that matters.

The Chair: We are going to explore that more in this session.

Q101 Viscount Stansgate: Both the organisations to which you referred—the Council for Science and Technology and the CMIT—have made recommendations. I am looking at the summary of the letter to which you referred. At this stage, could you just briefly reiterate the main recommendations you have made for tackling the issue of access to scale-up finance? I would then like to go on to a couple of follow-ups.

Saul Klein: If you are referring to the most recent letter—from October last year—the first recommendation was around accelerating efforts to support pension fund reforms. As Jon has said, even in the last week there has been meaningful progress. There is not just an awareness but real action going on in government, continuing the work that was started. While it will take time for funds to flow—obviously it is frustrating for these 800-plus companies that are sourcing funds non-domestically—in terms of pension fund reform we are on the right path. One can always go faster, but my analogy would be that the train is on the tracks in King’s Cross. It has not got to Cambridge and is nowhere close to Edinburgh, but it is on the tracks and knows where it is going. That is in progress. Not to pun too much as my wife would kill me, but it is in train.

Recommendation two is the connection between private and public markets. It is quite a lot more sophisticated and complicated, and I suspect it will take at least a decade. A lot of the Mansion House discussion—I say this as a venture capitalist—has been about allocating capital through venture or private equity into the innovation economy. Private markets are not just about those two asset classes; they are also critically about infrastructure and real estate, and this is a really important point. Infrastructure and real estate are two sets of assets that do not move. Human capital moves. It is the combination of these asset classes—arguably our Mansion House signatories are stronger at infrastructure and real estate than at venture capital, where they are really beginning their journey—where I think we could and should see funds flowing faster.

I will give you an example from one of our portfolios. If you are a low-orbit satellite company in Harwell that has, in seven years from inception, built low-orbit satellites, which is hard to do, and secured over four government contracts—the smallest of which is in the UK, the largest in Greece, the second largest in Portugal, and the third largest in Spain—you need manufacturing facilities to put the satellites together. Those are facilities that create advanced manufacturing jobs.

We need to look beyond venture and private equity as the asset class in private markets and look at infrastructure and real estate. I appreciate that this starts to get a little esoteric, but it is a very important point. When we are talking about bringing in capital, we are not just talking about venture capital; we are talking about hard assets that do not move.

There is a long way to go on this point, but I am actually quite optimistic because our asset allocators are very good at investing in infrastructure and real estate and are learning their trade in venture capital. If you look at how Railpen, L&G, M&G and Aviva are starting to think about investing, they are looking at integrated asset classes and innovation clusters, so there is some way to go there.

On the third point about creating the conditions to develop skills and attracting talent, this is not unique to this sector of investing in finance. We have the same opportunity across the board to ensure that the UK is the best place for the world’s best talent to want to come and innovate and grow businesses. Arguably, in a Trump 2.0 era, we have never had a better opportunity than now. The challenge there is not a single-department challenge; it is a DSIT-DBT-DfE-Home Office challenge, and a Whitehall co-ordination challenge. But if you go to any of those departments, you have Ministers who understand the opportunity.

On the fourth point about the infrastructure to support the reform of public services, a slightly subtle but important point is that the biggest driver of innovation is not investment but procurement. I know that the most valuable thing for any company we can invest in is not us investing more in that company; it is the company getting a purchase order. The opportunity for the state—clearly, the Prime Minister has put this on the agenda with Peter Kyle in DSIT—is to use data and AI to bring more value to citizens through public service reform.

That is a massive opportunity both to reform public sector procurements and to allow what one may think of as micro-primes—not the BAEs, Accentures, Microsofts or Palantirs of this world but the colts and thoroughbreds—to provide innovation to drive public sector reform. Once you have a contract with the public sector, the ability to raise either further equity or credit and to bring in commercial banking is massively increased. The Government have a very significant role to play here in terms of procurements.

The final piece—which is so basic that it almost does not bear saying—is consistent, sustained, meaningful convening: not social events but actual meetings where actual founders and investors are able to speak to senior officials and Ministers about what they need. I know this sounds extraordinary—that it would be helpful in terms of policy-making to get evidence from the front line on a consistent basis—but we are too prone to bringing people together for press releases and photo ops and not focused enough on bringing people together to build the trust and the familiarity, to Jon’s point, that drive economic growth. Fundamentally, finance relies on trust, and if people do not know one another, meet regularly and listen to one another, we will not drive a culture of innovation. Convening sounds really simple, but to do it well, consistently and non-performatively is really challenging.

The Chair: Have you seen significant signs of progress on those five recommendations that you made in October last year?

Saul Klein: To be clear, innovation is a long-term asset class. It plays out over 20 to 30 years, not over parliamentary cycles, quarterly earnings releases or news cycles. Like Jon, I actually feel that a lot of the infrastructure and plumbing are in place—I know we will probably talk about regulation—but it is now about delivery. It is about delivery not over the next quarter but over the next two Parliaments. It is really important to keep a long-term perspective here because, if we are looking for overnight success, we are going to be disappointed.

To go back to where I started, the great news is that we are starting as the world’s sixth or seventh largest economy; on the medal table we are silver or bronze. This is an incredible asset that we have, and we need to be patient but also impatient.

Sir Jonathan Symonds: Maybe that is a perfect place to pick it up. In a sense, we are well past the diagnosis and analysis of the problem. You can hear from Saul and me that the analysis is very consistent, and you could bring many Government Ministers in here and they would say much the same thing. It is now about implementation, and we should be impatient for progress but recognise that this is going to take time.

In truth, what we are turning around is a 25 to 30-year attrition of much of our basic capability, and this is really where CMIT is trying to be clear on what the steps are. For the vast majority of pension assets—the defined benefit assets—it has been about rapid de-risking and inoculation from volatility of financial markets as it turns up in a company’s profit and loss account statement. When I was CFO of Zeneca or AstraZeneca, that was my ambition; I wanted to talk about science and pipeline, not pension discount rates and so on.

But now, with defined contribution, the future of the vast majority of these people in the UK depends on the value of the growth and that pot at the time of retirement. It has stimulated a new conversation about the optimal way to deploy that very significant flow of funding this year, next year and over the decade, which will run into hundreds of billions, and we do not want those hundreds of billions to be turned into low-risk returns.

Consolidation is really important. If you are a £25 billion fund, you have access to opportunities, capability and analysis that you do not if you are a £1 billion fund or the vast majority of funds, which are significantly lower. So increasing the nodal scale of these funds is a good and important thing to do. I would differentiate one segment from this, which is the local government pension schemes. I know that is quite a controversial or hotly debated topic. The Government own the full risk and reward of that and therefore they can move at a faster pace in consolidation than will be expected for the commercial employer.

The second really important thing—as Saul has talked about—is defining the optimal asset allocation mix. Traditionally, it has just been public equities and government or corporate debt. What the Australians, the Canadians and a lot of American institutions have shown is that the optimal asset allocation mix includes public and private assets—the assets that Saul mentioned. We are not talking about high-risk venture investment; we are talking about private assets along a much longer continuum.

That debate needs to continue to the point where the providers of DC pensions recognise that the default option that is in the best long-term interest of DC members—our employees—includes that optimal mix. Nobody is going to define it in a way that has substantial risky assets, but it needs some. Once it is recognised that there is a legitimate role for private assets in that optimal mix, that capital is available to flow into opportunities.

We still need to work out how Aviva, L&G or M&G satisfy their allocation, and I do not think it reasonable to expect that every one of them deals directly with Saul, although they might. What is the way in which this money can be pulled and allocated in a way that does not expose the investment companies to binary risk? This is where the deployment vehicles need to be thought about.

In my view, one big success over the last three years has been the transformation of the British Business Bank. It used to be the last resort because it was bureaucratic, slow and inefficient and would eliminate risk. Now we have a vehicle that is competent and ambitious, has capital and a track record, and can become a meaningful partner to deployment of capital. But the first part of the journey—the journey to persuade—is a reversal of 25 years of risk aversion in asset allocation.

Viscount Stansgate: You have mentioned these big outfits. Is it just the case that someone is unwilling to be the first one to take the initiative and break through into this new mix that you have been talking about?

Saul Klein: There are two additional comments I would make to what Jon has said and to answer your question. Capital is flowing. However, it is currently coming from only two sources. One is the British Business Bank and the National Wealth Fund, and they are the same source: Treasury. Treasury is actively investing in the innovation economy, and it is doing that because literally the only other Mansion House signatory that is deploying capital at scale is M&G. M&G created a £5 billion programme from its balance sheet called the Catalyst fund, and has been actively co-investing—both domestically and internationally—alongside the National Wealth Fund, Northern Gritstone and the British Business Bank.

The point I want to make here is that asset allocation is a choice. While it is possible to optimise the regulatory conditions and the scale to incentivise the choice, the reality is that you can choose. Treasury has chosen, maybe because it needed to, and M&G has chosen. To repeat, there is £6 trillion that is not choosing to invest in the innovation economy.

I just want to debunk one myth, in my view. As a humanities graduate, having sat on the Council for Science and Technology, I have learned about evidence-based policy-making. I cannot just give a quote; I actually need to give data. An academic called Hendrik Bessembinder analysed the risk profile of investing in public equities in America in 2020. He analysed 64,000 public companies globally and found that 100% of the $70 trillion of outcomes came from 2.4% of the companies. So just in case we think we are safe putting our money in the public markets, guess what? Norway was right by the index, State Street was right by the index and Fidelity was right by the index.

So our asset allocators—the people who are sitting on £6 trillion of our citizens’ savings and long-term liabilities—have had choices to make. Thirty-five years’ worth of evidence is now there—both for public and private markets—that the likelihood of getting a return comes from an extraordinarily small amount of opportunities; it is called the power law. This is now fact and evidence; it is not opinion any more.

The real challenge—the first recommendation that we made in 2021—is that we need to massively upgrade our literacy, which is not easy to do, in terms of some of the fundamentals, like the evidence and power laws. Asset allocation in the innovation economy is more of a science than a humanities exercise these days. If we do not use the evidence or the data, at best we will be treading water and at worst losing money, which is not the position we want savers and people holding pensions or insurance policies to be in.

Sir Jonathan Symonds: I would just add one comment to that, which is that we have not incentivised long-term returns; we have incentivised long-term minimisation of the cost of delivering something. This is part of the barrier that needs to be broken, to recognise that Saul and his team offer high returns. But it is an expensive, highly skilled exercise to select from a universe, to invest and then to develop a company.

We have to move—as we are—towards a situation where long-term net returns after cost are what matters. This will start to stimulate the recognition that we need to create a new capability within many of these big institutions that is about how to invest longer term. Anybody can buy the market at 20 basis points or even less, but to access private capital and assets is a skilled task. This is a multidimensional problem; there is no one single solution. We have to rebuild the pioneering spirit that the UK had for many decades around calculated risk and return decisions.

Q102 Baroness Young of Old Scone: You have talked a bit about Mansion House, institutional investors and pension funds, but perhaps I could just press you. It is quite entertaining—if I may say so—that Saul is definitely a glass-half-full man and you are definitely a glass-half-empty man; that is a useful comparison. But if you were Government for the day, would you go straight to mandation for the 5% of pension funds into private assets? Are we pussyfooting around on that one? That is question one; perhaps you could comment on that.

Saul Klein: Do you want to take that first? I am happy to.

Sir Jonathan Symonds: It depends whether you want the half-empty first.

Saul Klein: I might surprise you.

Sir Jonathan Symonds: I would refer you back to my opening, that the innovation in this country is exceptional. No, I do not think the Government have any role to play in asset allocation decisions in the vast majority of cases.

In the pension schemes that they own—the Local Government Pension Scheme—for sure; they can allocate anything in any way they wish. But for private pensions, with the size of the industry and the skill of the people in there, they need to conclude for themselves what the optimal asset mix is. They should recognise that it is the mixed economy of public-private infrastructure real estate assets that provide the best long-term returns. It should not be the Government saying, “Meet this limit”, because it is a very dangerous game for the Government to get themselves involved in optimal asset allocation.

Saul Klein: I do not know if this will be a surprise to you or not, but I agree with Jon here. The key point here is scale and, if the Government were to mandate anything, it would be scale and consolidation.

I will give you a specific example here. We are now talking about local authority pension funds getting to the scale of £25 billion, plus or minus. That is tiny. In our latest fund cycle, we have a Korean local authority pension fund that invested in our funds, which is £80 billion. To my knowledge, there is no UK institution that is £80 billion, and this is a local authority pension fund in an incredibly dynamic economy but a smaller economy than our own. Scale really matters, and that is what Australia, Singapore, Canada and the Middle East have understood. With scale comes the ability to build specialist teams that actually know how to provide the optimal allocation mix.

What the Treasury can do is provide transparency on how the Mansion House group is doing on a quarterly, biannual or annual basis. They have made a commitment to allocate a certain amount of capital by 2030. We are a liberal democracy and an open economy. We are live on TV and have transcripts. Let us see how they do it. It is about motivation and incentivisation on that side, but scale really matters.

Sir Jonathan Symonds: Maybe I could just add a couple of thoughts: CVC and CD&R raised $25 billion each for their last fund and will probably raise another $20 billion when they come back in two years’ time. I agree that $25 billion is significant, but it is not anywhere—

Baroness Young of Old Scone: Do you want the local government scheme to be consolidated down to a much smaller number of funds?

Sir Jonathan Symonds: Yes.

Saul Klein: Korea, Australia and Canada are all smaller economies but have domestic pools of capital in the hundreds of billions and are all without 800 colts and thoroughbreds that they could invest in. There are good returns for our savers internationally as well as domestically. This should not just be about nationalism and investing in the UK; it should be about great returns for savers and policyholders. To go back to the beginning, the great news—I hate to be the bearer of good news—is that we are in the top three globally here.

Baroness Young of Old Scone: Let us turn to the issue of what else might happen. You have talked about why our institutional investors have perhaps not been keen to invest in our science and technology, infrastructure and real estate companies. What else should government be doing? It seems to me there is a whole bundle of initiatives that are pointing in the right direction but perhaps not going fast enough. If you were king for the day, is there something more that you would want done?

Saul Klein: Infrastructure.

Sir Jonathan Symonds: I would not put this as a problem only for the Government—a long way short of it because they are moving. They need to move as fast as possible and then hold the institutions transparently to account for what they are doing. What are their asset allocation structures? Where are they going with default funds? How are they consolidating? How are they gaining the expertise? How is the capital flowing? That is why I said what I said earlier. Mansion House I was a good initiative; the Lord Mayor really should be congratulated on pushing that. But the only thing that matters is not how many signatories sign up but what they do. They were not given the pressure of transparency to say, “You’ve agreed to do 5% by 2030. What have you done in 2025? What are you doing in 2026 and 2027?” Otherwise, we just will not make that tangible difference.

Q103 Lord Stern of Brentford: Thank you both very much for coming. For the other members of this group, I should say that I worked very closely with Saul on the Council for Science and Technology, which I have just come off after 11 years. You have been pointing very clearly to the missing of opportunities by pension funds in the sense that there are real returns that they are not taking. When John Kingman was here, he said that the biggest challenge is not what we are doing as managing; it is the appetite of the pension funds to do the kinds of things that you are talking about. Part of that, of course, is about presenting the evidence, although my guess is that they have had the evidence presented to them for quite a long time now.

The other part is around sharing risk. I worked as chief economist at the EBRD and the World Bank for 10 years. The UKIB, which is now the National Wealth Fund, and to some extent the BBB are development banks. What does a development bank do? It takes a long-term view—longer than many private institutions can—and is able to take risks because it is ultimately backed by the sovereign in many cases.

How do you get the hesitation, as it were, of the pension funds and the long-term ability to take risk position of the development banks—National Wealth Fund and BBB—to break the impasse you are talking about? You said educate the pension funds, but if people are nervous they look for company: “Don’t go alone if you think it’s a bit dangerous”. It is not actually as dangerous as they think it is.

That then points to two things from UKIB and the BBB, which I hope you can comment on. It is partly the leadership and partly the shareholding of those institutions. One is the scale and one is the willingness to take risk. They can guarantee, do first-loss offsets and so on, but in the past we have heard that they may not have been willing to take enough risk. They certainly do not have the scale; £28 billion for the National Wealth Fund is peanuts. The BNDES—Brazilian Development Bank—is 10 times that, and of course the Norwegians are on another order of magnitude.

Would you conclude then that the leadership of those institutions, and of course the owner of the institutions—ultimately us, the Treasury—should move to a much bigger scale, and as shareholders instruct them to go out there and take more risk, and back them when they do take more risk? There is partly an answer out there, is there not?

Saul Klein: As usual, you are on the money. Obviously, the state has a really important role to play in creating the right conditions for risk capital and risk attitudes to exist. Before we get to the point about development banks—which I think is really interesting, and Singapore does an incredible job here—I want to note some of the other conditions for success. The Government or the state can be an enabler.

First, there is regulation, which really matters in many innovative sectors. We really welcome the creation of RIO—the second-best acronym in government—the Regulatory Innovation Office under the leadership of Lord Vallance and Lord Willetts, which encourages our regulatory landscape to take managed risk. The Chancellor and the Prime Minister have been very supportive from a signalling perspective that—as you used to put it, and I always quote you—it is about standards more than regulation. It is about creating conditions for people to feel safe to innovate. That is a really important first step. Again, there is execution that is needed.

I want to reiterate the procurement points because, again, this is where the state is capable of making decisions. The state’s annual procurement budget is extraordinary and dwarfs the access to capital through the British Business Bank and the National Wealth Fund in any version of their future lives. We cannot keep letting ourselves off the hook on procurements. Again, there is really good progress being made by Minister Gould in the Cabinet Office and in DSIT as it relates to effectively procuring innovation to digitise and bring AI into the economy.

On this point about capital, I go back to the scale point. I agree with Jon that both the British Business Bank and what is now the National Wealth Fund have been on a really good journey for the last two or three years, but they are still too small. I would argue that the real value of development banks in Singapore or even the Middle East is not just about access to capital but about access to infrastructure and markets. For example, where EDBI is extremely strong in Singapore, it is not really about capital investment; that is what Temasek or GIC will do. EDBI will create the right conditions to land and expand in Singapore.

We also need to be thinking about what our regional EDBIs or even national EDBIs are so that we can bring infrastructure, jobs and innovation to the Glasgow-Edinburgh corridor or the south-west. We have all these incredible clusters around the UK where innovation is thriving, but there is no consolidated, integrated thinking between the local authority, the pension fund and the universities. There are huge opportunities in the development bank model, but at the end of the day scale and transparency matter. We should revel in the fact that we are an open, liberal democracy. As Jon said, it takes time to get to 5% of allocation from zero, but let us see how the journey is going.

Sir Jonathan Symonds: I might come at a slightly different angle to this. At what stage are all these opportunities that we have the capacity to create allowed to leave the nest and fly on their own? Until that point, they will need some support either from a nest or from the parents. This is where industrial strategy and industrial policy are going to become really important because, as we both said at the beginning, we have a very enviable choice.

I spend a lot of time in Europe. It does not have anything like the raw materials that we have in terms of technology, quantum computing, AI, machine learning and life sciences across every spectrum. We have an abundance of riches, but we need a strategy to say, “Where do we think we really can win?”. In my view, it starts with the universities and UKRI. We all know that UKRI has great ambitions, but we have turned it into a bureaucratic monster. It is not clear that we are going to develop world-leading capabilities in X, Y and Z and do everything in our power as a country to create those assets so that others can invest and build and grow them.

The same is true in life sciences. The idea of the Health Data Research service is brilliant. It is a unique attribute of the UK that we have a dataset that nobody else can build, but we have to stop talking about it and create it. We have the British Business Bank and others to come in and support the fledglings where private capital does not want to take all the risks. Procurement is really important. If we had an NHS that was ambitious in the adoption of technology, it would help stimulate the development of technology in this country rather than taking it too early to the US and other places that wish to adopt it. We need a clear industrial strategy—which I know is coming—that shows how public and private assets work together until such time as they are free to compete with the world.

Q104 Baroness Neville-Jones: A large part of my question has been dealt with, but could you perhaps say something about another financial instrument that has come into being, which is the Long-term Investment for Technology and Science, LIFTS? It was developed as a result of CST recommendations but has what strikes me as a fairly small portfolio. Would you apply the same comment, that it needs more money and needs to be bigger? Given the existence of the other two organisations, should it do something that differentiates it? I am not at all clear how these instruments should really fit together. Do you think they are being designed in a way whereby optimal functioning will take place?

Saul Klein: I was in Amsterdam last week. I would echo Jon’s points that London and Amsterdam are two of the world centres of financial innovation. While we celebrate our capital markets, Amsterdam invented the capital markets in 1604. We need to encourage experimentation. I do not know whether LIFTS is the right format for that or the British Growth Partnership, which the Chancellor is now facilitating so that the British Business Bank can take on third-party capital.

To your point, Nick, people like to have friends when they are going into risky situations. Allowing a Treasury-sponsored body to manage third-party capital for the first time with FCA approval is going to be a massive unlock. The British Growth Partnership is another vehicle that was created after this advice and is extremely well thought out. I am very hopeful—on Stephen Welton’s behalf as the chair of the British Business Bank—that some of the Mansion House group say, “Okay, here’s a great vehicle that we can participate in alongside Treasury”.

Again, whether it is LIFTS, the British Growth Partnership or £25 billion local authority funds, they are all tiny and are all rounding errors. Until we are routinely talking about vehicles that are at least £100 billion in scale, we are not doing justice to our own innovation economy. I go back to the point that we are world leading—bronze or silver medal—at innovation, but we are not even qualifying for the Wimbledon Championships in investing. For a country that considers itself to be a global leader in innovative finance alongside Amsterdam and New Amsterdam—New York—I am at a loss because we definitely have the brains to figure this out.

Baroness Neville-Jones: You have touched on that point. It would be interesting to hear a little more about the PISCES initiative, if you have views on it. It seems to me that it is being developed in secret; one does not hear about it. Perhaps I am not reading the right press, but it does not strike me that it is getting the headlines it needs.

Saul Klein: Our final recommendation in the 2021 advice was that we need private-to-public pathways, like the New York Stock Exchange or NASDAQ did. PISCES is a great piece of plumbing, but there is a more fundamental issue that Jon pointed to about whether our capital markets are big enough, back to scale, and therefore liquid enough. Whether PISCES exists or not, you can have a great bridge over a river, but if no one wants to get to the other side, who cares?

Sir Jonathan Symonds: PISCES is a great initiative. It was partly done in stealth and kept quite carefully because it was going to be immediately copied by other markets, which is indeed now happening.

Baroness Neville-Jones: We need to get ahead and use it, do we not?

Sir Jonathan Symonds: Yes. I think there is a launch at the end of this month. It is an incremental step that facilitates transactions from private to private. It is a step on the ladder and does not take you anywhere near the top.

Baroness Neville-Jones: Are you confident that the market will respond and produce something? It seems to me that there is a confidence-boosting effort in this.

Saul Klein: This is where I feel a mea culpa because I do not think we have provided enough evidence on the investment opportunity in the last four years. We have talked a lot about the problems, challenges, infrastructure reforms, LIFTS, Mansion House and PISCES, which are all essential pieces of plumbing. But what we have not done—which I will go back to—is celebrate the fact that we are on the medal table and have 800 colts and thoroughbreds which, if we want to be competitive about it, is France, Germany, Sweden—which is very good at innovation—and the Netherlands put together.

Baroness Neville-Jones: You should write Ministers’ speeches. We need to hear more of that.

Saul Klein: It is all here in black and white on GOV.UK, but the point is that once in a while, even when there are dark clouds outside, we need to say, “Look, the sun’s shining”.

Baroness Neville-Jones: Blow our sails a bit.

Saul Klein: Selling matters in any business, especially in national economies.

Sir Jonathan Symonds: That picture should be enough to stimulate a huge amount of energy and enthusiasm. We need to turn the spotlight back on to the institutions to say, “What is stopping you?”.

Baroness Neville-Jones: Yes, the positives.

Sir Jonathan Symonds: The Government can facilitate this through the pension reform, but they are not going to solve the problem; we need the institutions to recognise that these opportunities are there today.

Saul Klein: To put it in simple numbers—as I mentioned, I am a humanities graduate, not a scientist or a mathematician—there is £6 trillion of investable capital in a $3 trillion economy.

The Chair: Lord Berkeley, we have covered some of what you were going to ask.

Q105 Lord Berkeley: We have, so I shall be quick. It is a fascinating discussion, but you have both mentioned at some stage in your evidence the failure of procurement. I wonder whether you could say a little more about that because in my book our procurement in this country is bloody awful sometimes. I am sorry to have to say that. We fail compared with some countries we are all comparing it with. What can the Government do to improve it?

Sir Jonathan Symonds: If I start with my world—in health—there is a continuum that starts with outstanding basic research and the identification of therapeutics that go through a regulatory process. They get trialled and tested in this country and early, rapid use in the health system. The evidence of outcome is produced and then the circle starts.

Out of 100 people in Europe who get access to modern medicines, 20 are in the UK. I have believed for a very long time that if we really want to become an innovation economy—this is to Saul’s procurement point—we have to be a consumer. We rely on other countries to consume the product of our innovation. If the US is 50% of the world market for innovation pharmaceuticals, of course that is where you will go.

The commercial opportunity will always be there, but we release it far too early because we are not capable of generating a clinical trial system that is competitive even with Spain, or we have a health system that is willing to pay commercially viable prices for innovation and to use it. We have a multifaceted problem that we just do not have a national appetite to consume the fruits of our own innovation.

Saul Klein: I would not add a lot to that, but our co-chairs at CST would not forgive me if I did not point out some hits in our back catalogue. Paul Stein—former CTO of Rolls-Royce and the godfather of the small nuclear reactor work that it did—led a really great piece in the last couple of years that CST did on procurements. This has been a consistent piece of advice not just from CST but in general.

I am hopeful that, given the Government’s emphasis on using technology, data and AI to innovate in public services, de facto we cannot do that unless we figure out procurement. This will be a forcing function to improve procurement. As Jon said, the fruits of our innovation are being bought and invested in by others. Nick, you will correct me if I am wrong but the first rule of the state being involved in its economy is to be a first customer, not a second, third or fourth customer. This is an absolutely critical lever to success and if we do not figure this out, it will be black and white and not colour.

The Chair: We are running a little short of time now but have quite a lot more questions because we are so interested in what you are both telling us.

Q106 Lord Ranger of Northwood: Thank you for your time today; it has been very engaging. I am just going to focus in a bit. I have tried to digest everything; you have covered a lot of ground. I was going to ask about cash ISAs but Saul, you made a fundamental point about £700 billion sitting in cash ISAs—I have a microscopic amount sitting in one somewhere—the trillions out there and the third place we are in, which are all positive messages. But if I walk down the street and ask an average British citizen whether the UK is in third place or is a championship-winning country when it comes to innovation, I do not think they would say yes; I do not think they would recognise that question.

I would like your views on this. We talk about appetite, institutional appetite, confidence and trust, but it has to come from people’s pension funds and feeling that they can feel confident in investing, which comes from knowledge, sharing, understanding and generating that culture of investment. We have had a culture of cautious investment since the introduction of things such as ISAs because we needed to be a country of savers. These things have been hugely successful in turning us into savers, but not investors.

Coupled with the backdrop of the 2008 financial crisis and an era when government has not seen growth—we have seen economic struggles and everything else—are these elements playing into not having a culture of investment in the public? Does that then have a heavy drag on institutions? Therefore, what should we be doing to help generate that culture of investment beyond telling the institutions, “Come on, get on with it?”.

Sir Jonathan Symonds: It is a really important point. A big theme at CMIT now is retail participation because people often do not see through to the underlying assets that provide the return, whether it is cash ISAs or de-risk defined benefit schemes. Something like 8% of the UK population is exposed to equity risk, which is significantly lower than most other G7 countries. Retail participation—in a sensible way—is really important.

I do not necessarily want to go into what is happening in the US today, but what has driven the US market has not been institutions; it has been the 401(k) plans and private investors, and everybody would be able to tell you how that has translated through into their feeling of wealth. US consumption has been maintained because people have felt wealthy even if there have been constraints. So we need to re-establish a retail appetite and participation in equity returns. I will not say it, but the cash ISA just says that you should not be participating because it is too complicated. We have to educate. There is an alarming percentage of young people who do not own any equities, but they own crypto. Is that the right place?

Baroness Neville-Jones: It does not help if it is called unearned income when you do some saving.

Sir Jonathan Symonds: Yes.

Saul Klein: I point you to page 9 of the letter to the Chancellor. The final section is titled, “Change the narrative to renew a shared pride in the UK’s culture of innovation”. The first recommendation is, “Building and sharing evidence across government and industry”. There are lots of facts that we shared with the Mansion House group last November; I have brought some with me if people want them. The second recommendation is, “Improve literacy”. Literacy matters, especially in the early years.

Young investors are making a rational choice investing in crypto, for two reasons. First, it is a 24/7 market that has $3 trillion of liquidity in which to trade, whereas our capital market is what banks were in the 1980s: open from 9 am to 5 pm Monday to Friday with very little liquidity. So I would argue that young people are making a rational choice. If we want to reform capital markets—which is a different discussion—we would provide safe ways for them to invest in a 24/7, 365 liquid market rather than demonising it, but I will come off that train.

The final recommendation is, “Sustained and coordinated convening”. What we say here is that it is not just about the regions and the devolved Administrations, because we typically convene only in Whitehall and Westminster. We also say that it is about citizens and savers and point to the work that Camden Council has done by having a model of co-design with its community wealth fund. Australia and Norway have done incredibly well by focusing on the whole narrative journey for the beneficiaries and saying, “If you are participating in the innovation economy, here are some fruits of your investment, not just your savings”. This is what companies such as M&G are doing. It is these three things: evidence, literacy and convening, and not just in Whitehall.

Q107 Baroness Northover: As my question focuses on the life sciences, it is particularly for Sir Jonathan. I am sure you know that Sir John Bell has said, “We are in a bad place at the moment in life sciences. The industry has never been so negative about the UK”. Clearly, we have had historic strengths in the life sciences, and two of our largest science companies are in the life sciences, so is this a fair description?

I am aware that throughout my political career and life, there have been these complaints from the life sciences. So is this crying wolf or is it real and different? Despite the complaints in earlier years, the life sciences industry stayed in the UK, so what is different, if it is? What should the Government do to remedy this so that the pharmaceutical industry will invest here and support scaling up?

Sir Jonathan Symonds: John is usually right. I have had the privilege of working with him daily and weekly for a very long time, and his instincts are right. This time it is different, for a number of reasons. First, since Covid the competition for life science investments—whether it is clinical trials or research—has never been greater because people saw in Covid that the absence of a life science industry meant that you did not have the capabilities to support your population.

Secondly, the UK has always had the potential to become the competitive alternative to Europe, but that potential has always existed in the future. I would not give myself much more than three or four out of ten for the delivery of the Life Sciences Vision that John and I helped the Government produce. We cannot live in a world that continually offers potential. It has now become clear that without the procurement stimulus or competitive pricing of pharmaceuticals in a commercial environment that stimulates investment, we cannot live on future promises.

This is an important time to recognise how much innovation we want to consume within the health system and what we are willing to pay for it as a condition for continued participation in building the UK’s potential: an outstanding basic research science to build the clinical trial capabilities to turn the potential of a unique dataset for research and diagnosis into reality. This is the time when promises and potential have to be turned into hard delivery, both in commercial terms and in the assets that underpin the foundation of the future life science industry. John is right: this is a very important time for the life sciences industry while it is receiving so much attention.

Q108 Baroness Willis of Summertown: Saul, I am going to ask you the other half of the question because I have been really taken by the points you make about communication and the need to improve literacy and procurement. I would say there is a fourth part in education, which is the education of those who are actually dealing with the experts in our financiers. You have made the point several times that you are from a humanities background, but it seems you have actually managed to embrace all this knowledge. What do we need to do to really improve literacy in the financiers in order that we are able to take these risks, make these balances work out or persuade people to really shift the dial?

Saul Klein: As I mentioned, it was the first recommendation in 2021. It remains a recommendation, but arguably it is the hardest thing to change. If you look at the evidence, there are 150,000 venture-backed companies in the world. The likelihood that you will get to a $1 billion valuation is 1.8%. The likelihood that you will get to $100 million in revenue is 1.3%. If you tell most financial allocators that 98% of the time you are going to be wrong, they will not invest. That is how venture capital works. It is not just about accepting the evidence. We now have 60 years’ worth of data, so there is enough evidence to say that this is not about a quarter, five years or a Parliament; this is about 60-plus years. First you have to have the evidence, which we now have, so let us share the evidence with government and industry.

Secondly is the literacy point. You can share evidence with people, but that does not mean they will believe or are wired to accept the evidence, especially when the evidence suggests that you are going to be wrong 98% of the time. Improving literacy is where scale and diversification matter because if you have scale, you can draw in expertise. There is expertise in this sector as it is 60 years old and has produced seven of the world’s biggest companies that did not exist 50 years ago, so the evidence about venture capital is now incontrovertible.

We happen to be one of the best in the world at this, but that does not mean that it will diffuse through society. I believe we have to be not just ambitious but maybe a little contrarian in terms of how we think about bringing people on the journey. Accepting that risk is a part of growth and innovation is not just something one sees in finance; it is seen in drug discovery and music. We all know that Michelangelo made 1,000 revisions before producing the statue of David.

Baroness Willis of Summertown: What is it, then, about the UK versus America or other places where they have a much greater risk appetite? What can we do about it?

Saul Klein: I am not sure that America per se—

Baroness Willis of Summertown: Or other countries.

Saul Klein: The Bay Area has extreme risk appetite; I am not sure Arkansas has. It is important because our competition is the Bay Area, Boston and Seattle. We need to change the narrative to say that we should have pride in the fact that, in spite of all the things that we have said we could have done better, we are still two or three in the world. The opportunity is to wake up, allocate some capital and expand literacy so that a 10 year-old, 10 to 15 years from now—when they are able to invest, not just save—can say, “That’s so great. I can invest in one of these companies that’s creating great jobs in my neighbourhood”. These 800 companies are not just all in the Golden Triangle; they are across the UK. It is about showing, not just talking.

Baroness Willis of Summertown: I am sorry, but if I can just push you a bit more, show where? How could we take this forward? Going back and saying we need to change the education system is just going to fall on deaf ears.

Saul Klein: Something that CST has been working with DBT on in terms of the industrial strategy is that if you have evidence that 800 companies are growing fast and creating high-value jobs across the country in all sorts of different sectors, just presenting that evidence already starts to engage people in the conversation.

Baroness Willis of Summertown: It comes back to communication.

Saul Klein: We need to show what we have. It sounds so simple as to be ridiculous.

Sir Jonathan Symonds: The showing point is really important. There was a big initiative a few years ago, which was the pension portal. I suspect that very few people have a clue what their pension is worth, what it will translate to in 30 years’ time and how it has performed over the last 12 months, or any period for that matter. What changed the environment in Australia, as with the 401(k) people, is that people could see it.

Saul Klein: Transparency.

Sir Jonathan Symonds: There is full transparency; they know what it is translating into and therefore have an opinion on what they have invested in and can ask why it has gone down. Experiential participation is really important.

Q109 Baroness Neuberger: I need to declare an interest because I chair the University College London Hospitals trust and the Whittington trust. I think we have a meeting scheduled with you, Saul, and we have a long relationship with GSK. You have both been inspirational and given us lots of food for thought. I think we all agree with you but we have to write a report. What would be your most important concrete recommendations that we should put in our report to the Government so that they can get it right?

Saul Klein: Real transparency.

Sir Jonathan Symonds: And consumption of the fruits of our—

Baroness Neuberger: Procurement.

Sir Jonathan Symonds: Yes. We have both said that this is one of the most innovative places on earth, but we do not consume.

Saul Klein: Or invest.

Baroness Neuberger: Or tell the story.

Sir Jonathan Symonds: Yes.

The Chair: That is a very succinct way to end a fascinating session. We hugely appreciate your evidence. Thank you.