(Bloomberg) -- The new Labour government under Prime Minister Keir Starmer is looking to firm up a structure for the UK’s National Wealth Fund in time for an investment summit planned for the autumn, in a bid to showcase the initiative to an international audience.
Questions to be resolved include the fund’s leadership and whether there will be a reorganization of the UK’s multiple publicly-owned financing bodies. The government has committed £7.3 billion ($9.7 billion) to the fund and wants to raise three times as much from the private sector as part of efforts to turbo-charge the $3.3 trillion local economy.
To help get the initiative up and running as soon as possible, Rhian-Mari Thomas, chief executive officer of the Green Finance Institute and chair of the taskforce of financiers that authored the report for the fund’s blueprint, said some decisions have been made for “speed to market.”
It is now for Chancellor of the Exchequer Rachel Reeves and Treasury officials to make the final decisions in a review expected to be completed by the investment summit, Thomas said.
In remarks alongside the report’s publication on July 9, Reeves said the fund was being created in “less than a week” after the election and that there was “no time to waste.”
Fund Structure
One big issue will be whether the wealth fund will sit above or alongside other government-owned bodies, or if there is a wide-ranging shake up to consolidate the entities.
Initially, the government-owned UK Infrastructure Bank, set up in 2021 and run by former HSBC chief executive John Flint, will allocate money from the wealth fund, the Treasury said. Flint said he was “delighted” that the bank was being given extra funds to invest.
There will also be a role for the British Business Bank, which focuses on smaller enterprises. Its chief executive, Louis Taylor, said he hoped the fund would “create a single coherent governmental offer for businesses and a compelling proposition for investors.”
Streamlining the publicly owned agencies — which include the Scottish National Investment Bank, the Development Bank of Wales and the Advanced Research & Invention Agency — would increase the chance of success, according to Thomas.
“There’s genuine friction cost to organizations trying to navigate a fragmented landscape,” she said. Private investors have been frustrated in the past by approaching one body with an idea to be told “that’s not my mandate,” she added.
It would also be beneficial for businesses wanting to present projects to have a clear idea from the outset what is likely to be successful, as is seen to be the case with subsidies under America’s Inflation Reduction Act, Thomas said. “You don’t waste your time in protracted negotiations about whether your project is eligible,” she said.
Leadership Search
In the longer term, it will be important to appoint a leadership team with expertise in investing in private assets and emerging technologies, according to Lisa Quest, head of UK and Ireland at Oliver Wyman, who helped write the report.
That’s likely to require better compensation than the public sector, the taskforce agreed. Looking at other funds around the world, “you do see salaries that are closer to market rates in order to attract individuals that have the type of track record that we’re looking for,” Quest said.
Leadership for the fund, including the key role of chief investment officer, may need to come from abroad, as the UK doesn’t have deep talent in private asset investment, one person involved said, asking not to be identified discussing private information.
But getting heavyweight individuals will be important so they can negotiate deals with potential counterparts such as Blackstone Inc. or Singapore’s GIC, the person added.
That should help avoid the mistakes of the private finance initiatives of the 1990s, associated with the previous Labour government under Tony Blair, where contracts were often struck by local councils lacking business nous, leading to bad deals for taxpayers, the person added.
The team should have “operational independence” but must be aligned with government policies, the taskforce recommended. Currently, the government guides the Infrastructure Bank via a “strategic steer.” Such a mechanism could work with the fund, but would need to avoid frequent tinkering as its investments would be long term, whose impact may not be seen for years in some cases, another person said.
Green Plans
The wealth fund is likely to work closely with Great British Energy, which the Labour government is also creating to spur investment in clean energy, according to Quest. But there will be differences, others involved added, with the fund focusing on untested or emerging areas of exploration, such as green hydrogen and steel, they said.
The hope is to attract a higher sum from investors for some projects than the three-to-one ratio. “We wanted to set a conservative estimate going in and have the opportunity to increase that,” Quest said.
The task is challenging. The UK fund is starting at a much smaller level than the Canada Growth Fund that was launched in 2022 with C$15 billion ($11 billion) or Australia’s Clean Energy Finance Corporation, which started in 2012 with A$30 billion ($20 billion).
The previous Conservative government estimated last year that about £50 billion to £60 billion a year would be required by the late 2020s to meet the nation’s net zero targets. In opposition, Labour pledged £28 billion a year on green projects but abandoned the target following concerns that the country couldn’t afford that.
That move frustrated many green champions, who argued such an investment level could be reached through public and private involvement, as is now being planned. Taxpayer funds should be deployed using a “Swiss army knife” approach, with equity, debt and guarantees as needed, the taskforce’s report said.
The fund should be seen more as a “sovereign-backed catalytic fund” than a classic wealth fund, according to Thomas, as its objectives are different from those created in oil-rich places such as Norway or the Middle East.
The UK fund should “target a return, but we’re talking about in line with long-term gilts over the investment cycle,” Thomas said.
Investment Summit
Labour pledged to hold the global investment summit within its first 100 days in office. The fund is not expected to be fully operational by then, but the government is hoping to announce other commitments from overseas investors there, one person said.
The gathering is expected to be held outside London, in a bid to focus on other parts of the country, the people said, adding possible locations include Newcastle, Edinburgh and Manchester. London could still be a contender given the challenges of attracting business leaders from abroad and the chance of an audience with the monarch, as happened at the Conservatives’ 2021 and 2023 investment summits.
A spokesperson for the Treasury declined to comment.
With Reeves meeting the taskforce after just 100 hours in office, the speed of the work “is a great signal to international investors,” according to Huw van Steenis, Oliver Wyman’s vice-chair and partner.
The financial sector could get used to this level of interest from government, Thomas said. “I was joking with Treasury officials saying, you know, this is the speed of response we expect on everything.”
©2024 Bloomberg L.P.