Investment

About a year ago, Prospect published a series of views on where to consider investing given the world’s troubles. Diane Coyle, economist, wrote: “In the longer term, though, there’s only ever one sound investment: innovation. It’s the engine of growth, the source of real returns.” This struck me as a commonsense way to look at things for a private investor who can bear some risk.

But backing new ventures early to capture the gains possible when an innovative idea turns out to have major commercial potential—Google, for example—is among the riskiest ways to invest, simply because many ventures will disappoint for each one that soars. Even if you can accept that kind of risk profile, where do you look for a way to invest in innovative start-up companies?

One place is university research departments, which have attracted a lot more attention over the past few years. Coyle’s remark popped into my head again in mid-February. A small technology company called Oxford Nanopore said it would soon launch a device the size of a USB stick that could sequence a human genome in hours and cost less than $900, far cheaper than its nearest competitor. Among the names on the shareholder register as a “patient, long-term investor,” was Invesco Asset Management, whose head of investment is Neil Woodford, a favourite for thousands of British retail investors via the Invesco Perpetual Income, and High Income, funds.

Invesco is among a small number of big names that crop up frequently as backers of high-tech university spin-out companies. In December, it bought into a £25m share issue by Tissue Regenix, a Leeds University spin-out company specialising in regenerative medicine. But the scale of its interest in this area is made clear in its 45 per cent-plus shareholding in Imperial Innovations, the company set up to commercialise scientific research from universities including Imperial College, University College London, Oxford and Cambridge. Woodfood’s firm supported a share issue by Imperial Innovations just over a year ago that raised £140m to invest in high-tech businesses.

This increase in investment firepower is critical, as Susan Searle, CEO of Imperial Innovations, made clear when I interviewed her late last year. Searle is a veteran of British efforts in technology transfer and commercialisation, and argues that for a long time good business people would not work on turning university research into commercial propositions because there was too little money available to fund the long and risky development process.

After the Oxford Nanopore announcement, Woodford said: “On so many occasions the great technology being developed in our universities has not got funding. Then the technology—and its financial upside—has leaked abroad.”

That’s looking less of a threat nowadays. Since its fundraising, two companies created inside Imperial Innovations—Nexeon (advanced batteries) and Circassia (allergy vaccines)—have raised very large sums from Imperial Innovations alongside investors such as Invesco, Goldman Sachs, Lansdown Partners and Tudor. These two deals, worth £100m in all, show that an important ingredient that Searle identified is now available: a group of investors with pockets deep enough to fund high-tech companies for much longer, so products can be fully developed and markets built.

Doing that requires a lot of long-term cash and great research, of course. But it also demands access to a network of experienced business managers, tech-minded entrepreneurs and specialist advisers. Creating that kind of network takes years, but signs of its emergence bode well for Britain’s efforts to profit from the quality of innovation coming out of its universities.

Invesco invests in this area by buying large stakes directly in individual companies. But it also pursues a portfolio approach via its interest in Imperial Innovations. Private investors interested in this exciting but very high risk area should almost certainly concentrate on the second approach, which throws up several options.

The two most interesting are Imperial Innovations itself and IP Group, which has agreements to commercialise research from 12 British universities including Oxford and is a large shareholder in Oxford Nanopore, alongside Invesco. Imperial Innovations is listed on Aim and its shares cannot therefore be held in an Isa, although you can hold them in a self-invested personal pension. Shares in IP Group are eligible for inclusion in an Isa since they trade on the main market in London. These specialists are effectively the main gatekeepers to the sector for private investors. Therefore, one risk of buying shares in them is that they might lose access to the discoveries made in British universities once existing agreements end.

The optimist might conclude by suggesting that we have reached a turning point in Britain’s agonising, decades-long effort to profit from its outstanding record of scientific innovation, although one can’t help noting that optimism is not a very helpful quality for an investor. That said, long-term exposure to sources of innovation makes even more sense to me now than it did a year ago.

Disclosure: I hold shares in Tissue Regenix