The economic case for University-linked investments

There’s an old adage that if you want to build a great city, create a great university and wait 200 years. This is intuitive: University presence correlates with greater skill supply, a more productive workforce spurring innovation, and an increasing demand for goods and the real estate space from which to do business[1].

UK universities contributed directly £71 billion (10%) to the UK’s GVA in 2022 with an estimated additional 17% (£116 billion) indirectly. The effects in the wider economy through their supply chains and spending multipliers are estimated to support 768,000 roles, around one in 35 jobs[2]. Although there is a wide spectrum of outcomes, 80% of graduates see a positive effect on their lifetime earnings. This stimulates consumption, investment, and higher tax receipts – 60% of graduates in the UK represent a net positive return to the Exchequer[3]. 

Universities were responsible for over 10% of all European patent applications in 2019, up from 6% in 2000. There is a correlation between the number of patents a university files for and the external investment received. There is also a correlation between GDP per capita and academic patents per capita. There is, therefore, a local and national economic growth implication. However, of these academic applications, around half were submitted by just 5% of universities, suggesting technology translation is highly concentrated. 

Universities generate and support the commercialisation of intellectual property (IP), provide an environment for students to form start-ups, and collaborate with larger corporations on technology development via licensing IP. A spinout could become a self-sustaining company or provide returns to investors through acquisition or undergoing an initial public offering (IPO). 

As university spinouts are more likely to subsequently collaborate with universities, this suggests investment resilience. Researchers at MIT, which locates in Kendall Square in the US, found that collaboration on academic papers and patents decreased exponentially as distance increased, highlighting the importance of proximity[4]. 

In the UK, the regions that encompass the Golden Triangle – between London, Oxford, and Cambridge – have world-leading anchor universities and biotech companies, the highest R&D expenditures, and a supportive funding environment for scaling spinouts. Over the two decades to 2021, £7.5 billion was raised by spinouts from a small group of leading universities including Oxford, Cambridge, UCL, and Imperial. By the end of this period, these spinouts had a combined value of around £15 billion[5].

Spinouts outside the Golden Triangle have still been successful, but were relatively less likely to access equity capital, with 40% raising at least one round of external equity compared to 53% of those within. Beyond the Golden Triangle, we see emerging locations supported by anchor universities, enabling innovation in key industries targeting research funding (artificial intelligence, engineering biology, semiconductors, quantum technology, and net-zero tech). This could unlock feedback loops. Emerging locations include Bristol, Edinburgh, and Manchester. 

We acknowledge the risk that these loops disappoint either through lack of funding or greater relative success in established areas, increasing the performance gap.  However, we think this risk is manageable and, in fact, highlights an opportunity for private capital to fund and enable success.

This economic introduction to universities has summarised some of the compelling positive narratives, but it has also alluded to the need for investment discipline: economic (and therefore private market) impacts are uneven, they need to be well understood, and they often require some level of nurturing whether directly through VC investment or indirectly through real estate provision. We will explore more specific opportunities, and associated risks, in the next blog.

 
[1] The economic impact of universities: Evidence from across the globe, Economics of Education Review Feb 2019. One study estimates that a 10% increase in the number of universities per capita is associated with 0.4% higher future GDP per capita, controlling for several influences. Also see, for instance, https://blog.landg.com/categories/markets-and-economics/real-assets/locations-for-real-estate, 2018
[2] London Economics/Universities UK – The impact of higher education sector on the UK economy, Aug 2023
[3] IFS, The impact of undergraduate degrees on lifetime earnings, 2020
[4] An exploration of collaborative scientific production at MIT through spatial organization and institutional affiliation, PLOS One, June 2017
[5] Spotlight on Spinouts, Beauhurst; Royal Academy of Engineering, April 2024; Backing Innovation: University Spinouts Factsheet, British Business Bank, 2023