This is our second panel on financing the real economy. Thank you very much for joining us, Will Hutton. We have just heard from a number of economists, people with a great deal of knowledge about the current challenge, and I think you have heard some of the points that have been put to us about where the UK is in its hunt for growth. Where do you think we rank globally, and what is your viewpoint on where the UK is at the moment?

I am slightly more optimistic than the previous quartet. I agreed with some of the things they said. I hope you have all had a chance to look at “The Growth Trilogy”. I have brought it in, in all its splendour—three volumes, 230 pages and 600 footnotes. When I began working on this with my colleagues at the Purposeful Company, I shared quite a lot of the views of that quartet, but there are shafts of much more optimism that I have encountered in the last 15 months, and it is qualified. A number of things have happened just in the last 24 hours. The IMF is saying that we are going to be the second fastest growing economy in the G7 not only this year but next. Of course, Spain and Poland are faster growing, and there is always what is going on in India and China, but the UK has unexpected advantages in the big trends of the moment. We identify three. First, there has been an enormous growth in private markets globally. They were worth $3 trillion in 2003, and they will be worth $59 trillion in 2033. It is phenomenal. It is the privatisation of capitalism, in a way—the growth of private credit, private equity, venture capital, private infrastructure and private sector firms. Only a third of the biggest firms in Britain are now quoted on the London stock market. It is a huge phenomenon that interacts with an accelerated process of creative destruction, with the new technologies that are coming through. That is one of the reasons why the Nobel prize was won yesterday by Philippe Aghion, Joel Mokyr and colleagues for their work on creative destruction. That opens up the possibility of lots of start-ups, spin-outs and scale-ups. It turns out that the UK lies third after China and the United States in the number of unicorns it has generated in the last 20 years—a unicorn is a company whose valuation in the last placing of its equity made it worth $1 billion or more. We are third in the world for the number of start-ups. There are a lot of tax incentives for start-ups, and there is a lot of angel investing going on. We really are embracing the new in an unexpected way. A lot of these young companies that I encountered—the tech founders and their venture capitalist backers—are led by really inspiring men and women, and they are purpose-driven. I co-chair the Purposeful Company, so that is on my mind. They really believe in mission, and they are very mission-driven. In consequence, Britain has nearly 800 companies whose turnover is higher than $25 million and who are fast growing. Around 600 to 650 of them are so-called colts, with a turnover of between $25 million and $100 million, and the others are called thoroughbreds, with a turnover of between $100 million and $1 billion. We have more colts and thoroughbreds than France, Germany, Spain, Holland and Sweden put together. When you start thinking about why our growth rate is the second highest in the G7, notwithstanding the fact that we had that big fiscal consolidation last autumn and there is another one to come, it is because of these phenomena, in my view. We are an open economy. One stat you might like to play around with—do not worry, I am going to come in with some pessimistic stuff; we do pessimism well in Britain, and I would not want to be left out of the party—is that alumni from Cambridge University have created more unicorns than any other area in the world bar Palo Alto, and they were only narrowly pipped by Palo Alto. That is one of the reasons why Cambridge has become one of the happiest hunting grounds for American venture capitalists, and why every £1 invested in a Cambridge company has on average produced £19 of return—19x—in the last 25 years. One of the reasons why we have the largest venture capital industry in Europe is that a lot of American venture capitalist companies are here. That is because we are so fantastically brilliant at scientific entrepreneurship. Oxford, Cambridge, UCL, Imperial and Manchester create more successful tech spin-outs and start-ups than the rest of the university sector in Europe. It is a big deal. The problem, in my view, and what we say in “The Growth Trilogy”, is that, had we had the right ecosystem, Britain could now have a £1 trillion tech economy. Some of these points were raised by the previous speakers. We do not need to have just 1% of the FTSE 350 tech companies. It could have been 30%. The question to ask is: how can we, in the next 25 years, not reproduce the mistakes of the last 25? We have a lot of assets. You asked how we compare globally. On home bias, our institutions invest less in UK equity than any other country. The forward P/E ratios—the forward valuations of earnings streams—are the lowest in the OECD, even adjusting for growth and sector. There is a wonderful graph by Goldman Sachs on page 45 of paper 3 of “The Growth Trilogy”, if you want to make a note and look at it after I have gone. Our pension funds are far too small. They are tiny in comparison with those in the rest of the world. That means that they cannot take the kind of risks that other pension funds can. Tera Allas made this reference: we are brilliant at start-ups and scale-ups, but too many of them—94%—get acquired before they reach maturity. Half tend to be acquired by UK companies and half by companies overseas, largely American companies. We did a computation on the nearly 3,000 companies whose turnover exceeded $25 million. If a typical company that has a turnover of $25 million is taken out by a foreign buyer, normally from the United States, that is cumulatively $5 billion of lost economic value to the UK over a 10-year period. We have lost nearly 3,000 companies in the last decade—that is nearly $1 trillion that has been exported. ARM and DeepMind are some of the exemplars of that trend. We do not take risks as a country. We do not have blockholders who anchor our quoted companies, so the target rates of return tend to be too high, choking off potential investment possibilities. The stock market has shrunk in the last 25 years from being No. 3 in the world to No. 9 or No. 10. There are a lot of things to put right. However, some of what the Government are doing is moving in the right direction: pension fund consolidation and giving the British Business Bank some money. I will stop, but two or three points made by the earlier speakers need challenging. First, I am happy to supply the Committee with the names of some serial entrepreneurs who I think you should interview. I think you should interview Demis Hassabis, the founder of DeepMind, and I think you should interview Stan Boland, a serial entrepreneur. These men have made serious money, and their strictures on why they were not able to do more in the UK are well worth your Committee hearing. We must put that right in the period ahead. What Stan will tell you—this puts the points of Tera Allas on their head—is that if we can find the risk capital, we have such a dense pool of entrepreneurial talent in Britain, and they will come forward to use it. Supply of capital brings forth the entrepreneurs, not the other way round. Again, if you want me to I would be happy to supply places you could visit, because some of these companies are just inspiring—Pragmatic Semiconductor makes the smartest semiconductors in the world; Matillion is fantastic. I could go on—

No, thank you—

I want to challenge that. I want to talk about the opportunity—

Let me come to one of my colleagues, because they have a question they want to pose to you. Joshua Reynolds, would you like to kick off in that direction?

Keeping in mind what Tera said earlier about public sector investment potentially crowding out some private investment, how would you assess the approach that the Government are taking to leveraging that public investment to crowd in business investment?

Crowding out is a particular phenomenon. It may happen in a particular part of the economic cycle, but in general I don’t buy it. When making investment projects, large companies want to lay off the risk as much as they can. One of the roles that the British Business Bank is successfully playing—this is the answer to your question—is just that. By being a lead investor, which is a role it can increasingly take now—it has been given the right to write cheques of up to £50 million for a particular share stake it may take—there is a signalling mechanism in the market that crowds in venture capital. Again, I have talked to some venture capitalists, and they will follow the signal that British Business Bank can lead. It has done the due diligence, and it thinks that x, y, z company is worth £50 million, or whatever the figure is, and it will come in. There are leverage possibilities of the British Business Bank leading. Let us take Pragmatic Semiconductor. The British Business Bank gets involved, and so does Northern Gritstone, the local northern venture capital company run by Jim O’Neill, who is another person to talk to. Catalyst, a £4 billion growth-equity division of M&G, came in, as did Cambridge Innovation. Its cap table is still dominated by UK shareholders, and I think it is likely to stay UK-owned. If it can solve some of the technical problems, it could really come through. I think the crowding out model in that sense, using the British Business Bank and the national wealth fund to supply the British Business Bank with much-needed capital—arguably the British Business Bank needs to close the equity gap, and here I strongly agree with what it was saying. The equity gap, just for scale-ups, is £10 billion to £15 billion a year. Over the next decade we need to find £100 billion extra, over and above what current structures will provide. The only way to do that in my mind is pension fund consolidation, allowing superfunds to emerge that can adopt tiny fractions of capital that are prudent. Given their size they can do it, while smaller ones cannot. They can put some money into a fund of funds that venture capitalists can deploy in partnership with the British Business Bank so that we can get cracking. That is a model that needs unpacking and exploring—again, I urge the Committee to do that. That leverage does work.

Excellent. Thank you.

Not everything in the venture capital garden is rosy. In the second of my papers, a whole chapter is consecrated to the weaknesses of venture capital, some of which you just adumbrated. In the round, however, we only have to look at the American story: venture capital supplies 0.2% of investment every year in the States, yet half of American public equity companies were venture capital backed, and all but one of its 14 $1 trillion companies were venture capital backed. In the circumstances of today, with equity being the prime thing needed, a risk-taking equity investor is what a scale-up needs, given the fast movement of technology and the pace of creative destruction going on. Consequently, venture capital is an indispensable tool. It is the institution needed in the 21st century to get an economy on the move, in my view. What can we do? With nearly 800 of the fast-growing companies, we do not really know what sectors they are in. One of the venture capitalists— Phoenix Court, run by Saul Klein, who is the most successful venture capitalist outside the United States—is conducting an exercise to find out: who are they, where are they, what sectors are they, and to what extent do they map on to the industrial strategy eight? My hunch is, very significantly. If I was in charge of industrial strategy, it is all very well talking about training and infrastructure—you can do all that—but you must have a critical mass of consequential-growth companies. If you like, they are the horses pulling the coach. If we have not got them, it is “Hamlet” without the prince. It is about identifying those companies and ensuring that they have the kind of support that they need and that their cap tables are predominantly UK, keeping them in the United Kingdom as far as we can. Some of them have to go to the United States, because that is where the markets are and all the rest, but we need to do a much better job of keeping them in the UK. We need to stop the export of our potentially great companies—well, we cannot stop it, but we can certainly curtail it and get the balance better than we have. That would be a major preoccupation for me if I was in Government.

Your “Growth Trilogy” report talks about risk aversion and a lack of appetite to take risks. Governments over the years have tried different things to change that culture, but it is difficult. Things like the Mansion House accords were quite successful, I think, in trying to change the culture a little. Some of us felt a bit queasy about attempts to prod pension schemes into putting more money into the UK, and earlier on you mentioned pension funds in this country simply being too small to take much in the way of risk. What can the Government do? How can they engender and foster a culture of risk taking in equity investment?

This is a huge, huge story. On the retail side, we have some numbers—I am sure you have had a look. Looking at page 72 of the third report, a UK retail saver-investor will disproportionately invest in residential property and cash compared with those in that list of OECD countries. It is not just the pension fund trustees, but all of us—we do not take risks. By the way, given where residential property prices are, a figure there shows that had someone put money not in cash, in an ISA, but in equities over the past 30 years, the money would have been more: a pool of ISA savings that is currently £125 million, £130 million or £140 million in cash would have been £500 million. We are making a mistake, collectively, in not taking risks. Then you have the pension fund side. I think that pension fund consolidation is a precondition. It was begun, in fairness, by the Conservatives in government in 2021, and has now been followed through by Torsten Bell and Rachel Reeves. We need to get a critical mass of pension funds—certainly above £25 billion in size and hopefully above £50 billion—as fast as we possibly can. We need to build up the Pension Protection Fund, the PPF, and we need to get the local government pension schemes to consolidate as fast as we can. I have advocated—and we advocate in “The Growth Trilogy”—for the establishment of funding, certainly for public sector pensions. We should not be paying employees in the public sector without funding their pensions. We need to introduce funded pensions across the public sector—in the health service, the armed services, for teachers and in the central civil service. I would expand that, by the way, to make it a kind of British pension plan that, over the next two generations, would pay pensions out of accumulated funds rather than on a pay-as-you-go basis through the tax system. We have to have these funds that are big enough to start taking risks, and we have to incentivise them to invest in the UK. The home bias is just—we are just so pathetic. We come bottom of the league table for investment in ourselves. Even when you adjust for sectors, the growth character of our companies and all the rest of it, we just do not invest in ourselves. I personally think that, in defined-contribution pension funds, where members default their decisions on asset allocation to the investment managers, the presumption should be that 25% of the equity portfolio should be in UK equity. I think that should be backstopped—there is a lot of support for this in the City, by the way—by the withdrawal of tax concessions if that equity allocation is allowed to fall below 12.5%. Goldman Sachs has come out saying that they lean into that, partly because they produced a graph showing that the lack of home bias is why our forward P/E ratios in Britain are so damn low. The London stock exchange is also a keen enthusiast, for obvious reasons, but so are a growing number of—

Do you think there is a groundswell towards that? You are talking about an enormous cultural change, but do you think the groundswell is in its favour?

I am talking about how it is in our hands, in our country, to build a £1 trillion tech economy by 2040—or something even bigger than that—and not to repeat the mistakes of the last 15 years. The precondition is an acceptance that, actually, it takes risk. As any venture capitalist will tell you, some venture capitalists have never invested in a colt or a thoroughbred. There are 4,000 venture capital companies in Britain, and only a handful have managed to invest in more than half a dozen successful enterprises. That is why you have to have this fund-of-funds approach, in partnership with the British Business Bank. On how to finance the real economy in a 21st-century economy—the subject of your inquiry—the exam question that you have to answer is about promoting these equity flows. We know, a priori, that many of the investments will not come through, because that is the nature of the beast. The American venture capital industry shows what is possible, and there are all kinds of reasons—scale, risk appetite, tax breaks, clever public procurement through DARPA, and so on—why they have managed to do it. We can do the same. We have a very similar institution structure. But you are right: that is the precondition, as both individuals and institutions, and we have to accept that if we want that kind of economy. By the way, that includes spreading it around the country. The gap between the appetite for risk capital and its supply is most acute in the British regions of the north-west, north-east, east midlands and west midlands, Yorkshire and Humberside, and the south-west. Even so, in paper 1, where we look at where the British unicorns are, you will see that there are a number in Bristol, in Manchester, in Newcastle, and a couple in Edinburgh; they are not only in London and the golden triangle. But yes, you are right: it is about looking that squarely in the eye and actually using the tax system as far as we can, alongside other mechanisms, to promote an equity-risk culture. Social Democratic Sweden is actually a leader in trying to educate its populace on the merits of risk, thanks to which its IPOs and stock market are flourishing, so it can be done.

As an ex-entrepreneur, I am nervous about things like the British Business Bank. Generally speaking, I find that Governments make terrible investment decisions, so I am nervous about just leaving it to the Government to do that, and for the British Business Bank to be putting more money in on behalf of the Government to do that. They are also saying, “Well, you’re allowed to do this, but you’re not allowed to do that, and you have to do this here. Social policy is here, and economic policy is there.” While we were talking, I made a comparative grid through ChatGPT of what GIC does in Singapore, what the Norwegians do and what we do. We are all over our British Business Bank, telling it what to do. However, the Singaporeans and the Norwegians leave them alone. Guess who probably gets the best returns. I am really worried that we will just end up putting a load of taxpayer money into Government-owned banks that just make really rubbish decisions, backing favourites and blowing smoke wherever feels most comfortable. What is wrong with the private equity and the VC investors? There is loads of money about. Should we not be working on getting our policy structures better for the business environment? It is about the carrot rather than the stick. People want to be putting money into the UK because it is a brilliant place to invest.

There is some of that happening already of course, and there is an element of that already. First, the British Business Bank supplies between 10% and 20% of all venture capital in the UK. Secondly, it has created over 50 unicorns, so it is not entirely the crap organisation that you say.

I am not suggesting that it is, but I am just—

Let’s call a spade a spade, Charlie—you laid into the BBB. I can introduce you to a whole bunch of venture capitalists who actually think that having the BBB as a lead investor is a really important signalling mechanism. I do not see any way to grow the venture capital industry to the scale that we want it to be, and to close a £10 billion a year equity gap to support our scale-ups, without it. I think Steve Welton is a good guy, and I think the CEO is a good man. I know it has its critics, and it is not perfect. By the way, I do think that the calibre of people in both the British Business Bank and the Pension Protection Fund is very high. I think the PPF should be given a greater role in the consolidation of DB pension schemes than it currently has, and that is another part of the jigsaw. Too much of the more than £1 trillion of defined-benefit pension money is lying idle in my view. Half of it probably needs to be crystallised and annuitised, but there is another half that could be invested in growth equity, and certainly in public equity. It is not just about venture capital; it is also about having vibrant public markets. If we want to get a flow of consequential growth companies to stay anchored in the UK, that means having IPOs here and a vibrant public stock market. A rising stock market is a bloody good thing, and we need to talk in these terms much more than we do.

Will, I am talking about operational independence.

Totally—absolutely totally. We are as one, shoulder to shoulder—100%. We have to give it operational independence, to the extent that it does not have it. Again, a very useful thing that this Committee could do would be to prioritise that and tease out from the leadership team at the British Business Bank whether they have operational independence. I think that they probably are leaned on a bit too much. On the other hand, it is public money, and it is aware of its responsibilities as a public institution. You represent constituencies all around the country. It is the best that we have in representation for the midlands, north of England and Scotland. We need it, certainly for venture capital going there of its own accord, and it will be pulled there by the BBB. I entirely agree that it must have operational independence and must be given the freedom to decide what is commercially viable or not. If it does not want to make an investment decision because it does not think it is going to work, it must be free to do that and, alternatively, to scale up if it thinks that is necessary. Even if it is in the golden triangle in Oxford or Cambridge, which have so many winners already, if it sees something it should back there, it must.

We have had a number of investment summits that seem to have been very positive. We have heard a lot of people talking about the types of investments they are going to make. In the west midlands on Monday, we have a regional investment summit, and we have a regional mayor, Richard Parker. What message would you send to him and those potential investors ahead of Monday?

Gosh. In the west midlands, thank God Jaguar Land Rover is resuming production. There are three things you have to get right to get a growth story going—actually, more than that probably. You have to get productivity up in the foundational economy, and I include the public sector in the foundational economy. I can send you some stats that show that. They were going on about the collapse of productivity in the health service—correct, but actually, it is not fabulous in retailing or utilities either. There are a lot of privately owned areas of the foundational economy, such as the NHS, where productivity is really not very clever. You have to get the story right in the foundational economy. That is about training and incentives, and actually, it is where lack of investment has its biggest adverse consequences. That is one thing you have to get right. Secondly, once you have got that right, the next story is the future—the future economy. I wanted to get the figures together for you—I hope I will be able to get them for you before you finish your work—on, for example, where the 770 colts and thoroughbreds are. I would expect at least 50 of them to be in the west midlands, and I bet you that no one knows who they are. They might know half a dozen of them, but they will not know who the whole 50 are. You need to identify them, organise their clustering, make sure that the mayor and the public authorities are doing all they can by public procurement and training, and make sure that the talented people are on the ground for them to hire. That would be my message. If you get those two things right, the inward investment will come through, and you will keep Jaguar Land Rover going strong, if it feels it is nested. You have some wonderful universities there. There is some advanced manufacturing going on in Coventry and Warwick. There is a lot to build on. That would be my message.

That is fantastic, and very uplifting, as we heard from our previous panel about the extreme challenges we face, and about the short term versus the long-term challenge. There is certainly a very well-made point about getting the growth narrative clear for the future economy that we all want the UK to benefit from.

There are a couple of other things I want to say before I go. There is a whole public procurement story. There is a whole corporate procurement story—you talked about risk, John. Our corporations just do not take risks in sponsoring investment in their supply chain—in supporting their supply chain. I know a number of fintech companies that have gone to New York because they cannot persuade the UK financial houses to support our fintech sector. There is just not the same attitude to risk, not only in public procurement but also in corporate procurement.” I also think that taxation should be organised so that it is much more contingent. We have discussed withdrawing tax relief on pensions; I also think that if a US company takes out one of our major tech companies—I know that Innovate UK is thinking in these terms—the grant should be repaid. The UK taxpayer should not get nothing back from five or 10 years of support for company X, Y or Z. There should be much more contingency—in R&D, for example. You asked the other panel about tax in the Budget. One thing I would do is introduce contingency across the piece. A 100% corporation tax allowance? Yes, but we want additional investment next year. R&D tax credits? Fine, but additional investment please. Let us see some consequences for those tax breaks—some phasing and an imperilling of the tax concession, on a taper to be worked out, if it is not following through. Lastly—it is anathema to raise this, in a sense, but I think it is important. As Adair Turner mentioned, the statistics are quite awe-inspiring. In London, Oxford, Cambridge—the golden triangle—Bristol, Manchester and Edinburgh, and to a degree Glasgow, with its space sector, and also on the Eurostar back to Paris and Eindhoven, where Philips is based, there is the densest concentration of high-tech start-ups and scale-ups outside Palo Alto. In the trade, they are calling it “the new Palo Alto”. There is a labour market there. If you are a scale-up in Cambridge and you want a chief investment officer, you might recruit her from Eindhoven, and Eindhoven might recruit a chief financial officer from Manchester. It has to be recognised that the tech economy is making a nonsense of Brexit. The story, I know, is about getting into the customs union or the internal market, but something that would fall short of that but would produce rich dividends would be the creation of an EU innovation area. Some venture capitalists—the British Private Equity and Venture Capital Association and others—are advocating a thing called EU-IN: a kind of EU innovation area. It would not involve the whole fandango of rejoining the European Union, but here is the point. If we get our ducks in a row along the lines that my colleagues and I have suggested in “The Growth Trilogy” and we really become, and it becomes obvious that we are going to become, the third biggest tech economy in the world after the Chinese and Americans, with a whole series of specialist areas where we are making ourselves best in class, we will become a Mecca for not just our own venture capital money but money and talent from the rest of the EU. We should regard that as a wonderful opportunity, not as an infringement of our sovereignty.

That was really helpful and enlightening. Thank you for sharing your insights from “The Growth Trilogy” and for answering our questions so helpfully. We have a lot to take away with us, and some positivity to investigate as well.