National Wealth Fund
Summary: The UK Investment Bank (UKIB) is to become the National Wealth Fund (NWF), with a broader investment mandate. £7.3bn that was earmarked for the NWF will be cut by 20% and given to the UKIB, in addition to its existing £22bn capitalisation, to invest in five priority sectors in support of a new industrial strategy and the governments growth and energy missions. Individual sector allocations will disappear (ports had been allocated £1.8bn).
The report on the development of the National Wealth Fund can be found here. A longer summary of the document is below. We will consider this as we continue to develop our thinking and our working paper, which can be found here.
Funding: The Chancellor has cut the allocations for the five priority sectors by 20% from £7.3bn to £5.8bn with the remaining £1.3bn reserved to “maintain flexibility in how the government can best deliver against its aims for the NWF”, which we assume means spending outside of the five priority sectors. Ports are one of the Fund’s five priority sectors with £1.8bn of the overall pot originally allocated, although specific sector allocations appear to have been dropped. This means that ports will receive a share of the overall £5.8bn rather than a dedicated pot as per the recommendation of the NWF Taskforce in July (see BPA summary of the Taskforce report in Circular 180).
Structure: The Government say that the UK Investment Bank will now operate as the National Wealth Fund, instead of alongside it. The report says that the NWF will have a broader mandate than the UKIB, extending beyond infrastructure to support delivery of the government’s new industrial strategy in areas where an undersupply in private finance exists, working alongside the British Business Bank’s finance for smaller companies. The report says the NWF will ‘build’ on UKIB expertise as well as inheriting its current £22bn capitalisation (in addition to the £5.8bn that has been promised for the NWF).
Risk appetite: The UKIB will take on more risk than it currently does to facilitate higher impact in individual deals. It will offer an expanded suite of financial instruments, which will include performance guarantees and trials of new blended finance solutions. The report says that investments will be in service of service of the government’s Industrial Strategy, clean energy mission and growth mission. The NWF will also be ‘aligned’ with the governments ten year infrastructure strategy and plans to improve infra delivery. It will retain its target portfolio mobilisation ratio of 1:3, meaning it will aim to mobilise £3 of private investment for every £1 of NWF investment.
Engagement and outreach: Government say the NWF will be conduct more outreach to identify expanded project pipelines and structure innovative transactions with project sponsors, industry, local authorities and government departments and that it will be focused on additionality, “never crowding out private investment” and that it will have a strong regional focus, working in partnership with mayors in support of local growth plans.
Mandate: Government say they will pass legislation to broaden the NWF’s legal mandate beyond just infrastructure investment and set out a framework of investment principles and a statement of strategic priorities, setting out the policy priorities for the organisation while allowing it to remain operationally independent. Government also confirmed that, in the short term at least, the NWF will crowd in investment at an individual deal level rather than at a fund level.
Functions and support: The report says that, of the £23.8bn available for private sector banking and investments, £13.8 billion will be for debt and equity investments and £10 billion of guarantees, providing corporate and project finance to invest across the capital structure. Debt can be provided on a fixed or floating rate basis and includes senior debt, mezzanine debt and bridge financing. Equity financing will include including ordinary equity, preferred equity and convertible loan notes. Guarantees will include financial guarantees, credit enhancement guarantees, first loss guarantees, and performance guarantees such as construction bonds. The remaining £4bn of the of the NWF’s £23.8bn total capitalisation will The NWF will also have £4bn available to support local authority advisory services and lending.
We have produced a graphic to illustrate some of the changes, below. Click or tap on the image to enlarge it.
