OakNorth boss says ‘wealth creators’ leaving UK over tax hikes
The co-founder and chief executive of challenger bank OakNorth has warned that “wealth creators” are fleeing the UK over tax hikes as he accused the new government of falling short on entrepreneurship.
Rishi Khosla, whose start-up bank has lent more than £10bn to businesses since launching in 2015, told City PM that “even when you have a balanced view, it’s hard to see how” Labour has delivered on its promise to boost economic growth.
Chancellor Rachel Reeves has refused to rule out further borrowing or tax rises following her first Budget, which sparked backlash from business leaders over measures including a hike in employers’ national insurance contributions.
Asked about the state of UK business confidence following the Autumn Statement, Khosla, a former Conservative donor, took a deep sigh.
“When you engage with the current government… they seem to understand very clearly that growth is the way to take the UK where it needs to go,” he said. “But the action doesn’t necessarily match the narrative.”
While acknowledging Labour’s argument that it needed to fill a £22bn “black hole” in the country’s public finances, Khosla said it was “disappointing” not to see a greater emphasis on growth in the Budget.
“Doing that along with doing things which are very pro-growth, which are very pro-entrepreneurship, which are very pro-innovation would have been good,” he argued. “And that was totally, in our view, missing.”
Rumours that Labour would hike capital gains tax in the Budget triggered a slew of letters from prominent founders, including Khosla, warning that Britain could become a less attractive place to start a business. Reeves ultimately raised the maximum rate to 24 per cent, from 20 per cent.
Elsewhere, tax advisers have said wealthy clients are making plans to leave the country after Reeves confirmed the abolition of the non-dom system, which allows wealthy foreign nationals only to pay tax on income and asset gains earned in the UK.
“I absolutely know that the change in approach to taxation for wealth creators is driving, has driven, wealth creators out of this country at a rate which, frankly, I have not seen before,” Khosla said.
“All the people I know who have done that have been wealth creators, and so I just find it incredibly disappointing that we’re losing that talent.”
He further argued the government’s investment strategy has been weighted too heavily towards major corporations, instead of start-ups.
“I think there may be a bias in this country now with the new government that the people who you need to invest more in this country are large companies,” he said.
“Our very strong view is that you need that entrepreneurial community, you need that innovation, you need those start-ups, those growth companies.
“Over the last two-and-a-half decades, the whole vibrancy of start-ups, growth companies, the venture scene, talent has totally transformed. To be rowing backwards from that feels really painful.”
Hundreds of large retailers and other companies have warned that price hikes and job losses are inevitable as they respond to higher labour costs.
Khosla said he was not materially concerned about the higher costs OakNorth would face but that “for the companies we support, the companies we fundamentally provide financing to, I am”.
“Any company which employs living wage, minimum wage type individuals, their margins generally aren’t there for them to absorb that kind of pickup in NI,” he said, arguing they would have to “effectively trim headcount to be able to stand still”.
“And especially if you’re in the consumer-facing sector, you’ve already passed so much inflation through to your customers – there’s a limit on how much more you can pass through,” he continued.
US expansion and IPO plans
OakNorth lends to UK businesses with between £1m and £100m in revenue and also offers personal accounts.
The SoftBank-backed firm, valued at $2.8bn in a 2019 funding round, has expanded two new core business lines this year by lending to the same segment in the US and providing business banking through products like savings accounts and cards.
“US lending has been multiple times what we expected, business banking has been more or less where we expected it to be – so really strong traction in both of those areas,” Khosla said.
The London-based bank’s pretax profit rose 23 per cent to £187.3m in 2023, from £152.3m in 2022. This summer, the lender received regulatory approval to proactively market its products and services from its US office.
Khosla said OakNorth would “continue to look at multiple options” for scaling up its US operations, including applying for a banking licence and acquiring a bank in the country.
He added that while OakNorth’s model of financing the “missing middle” of businesses that it argues are underserved by larger banks “works in many more markets”, the firm was not currently planning any further international expansion.
“That’s a dynamic which exists not only in the UK and US but across every major market where we’ve looked,” Khosla said. “In some markets it’s skewed larger, in some markets it’s skewed smaller, but there is that gap in every market.”
OakNorth, one of a crop of fintech ‘unicorns’ to emerge in the 2010s, is also weighing up a stock market float. “It would be super if more of these businesses were to go public and perform well,” Khosla said.
But what could prove a much-needed boost for the London Stock Exchange’s quiet IPO scene, or yet another snub in favour of New York, is likely some ways off.
“It’s something which we consider from time to time in terms of our thoughts around it, but it’s not something we’ve got a specific plan around,” Khosla said. “We don’t need a capital event because the business makes money, we fund our own growth.”
Still, Khosla gave Labour and the LSE some praise for their efforts to inject more life into Britain’s capital markets and lure more IPOs to the capital, following a listings drought and heavy outflows from UK equity funds.
Among them, at her maiden Mansion House speech last month, Reeves announced plans to legislate in May for a regulated stock market called Pisces, a Conservative-born scheme for investors to trade shares in private companies.
“I would say that’s great,” Khosla said. “Get it out, start testing it, start building liquidity.”
He also backed measures to boost pension fund investment in UK stocks but flagged “a massive cultural change which needs to happen in terms of risk aversion and appetite to invest in privates and alternatives”.
“I think they’re all well placed,” Khosla said on the government’s recent efforts. “A lot of this will come down to how well they’re executed.”