Written evidence from British Private Equity and Venture Capital Association (BVCA)(SUK0106)
Summary
We are pleased to share the British Private Equity and Venture Capital Association (BVCA)’s submission to the Science and Technology Committee’s inquiry into financing and scaling UK science and technology: innovation, investment, industry.
The BVCA welcomes the Committee’s inquiry into this subject. The UK’s venture capital market is one of the most important in the world, with £9bn invested into UK venture-backed businesses by VC firms and others in 2024. More than 9,000 businesses are backed by VC investment in the UK, and that investment supports 378,000 jobs.
With that in mind, the UK should be the best place to both start and scale a business. As the Committee acknowledges, the UK has a world-class research base, universities, and a thriving ecosystem of start-up and spin-out companies. However, there remains a significant challenge in translating research, development and innovation into companies that start and stay in the UK.
There is a significant opportunity for the Government to improve UK economic growth and create an investment environment that is fit for purpose. Alongside a stable and competitive tax framework, which is essential to build confidence and enable private capital investment to flourish, the BVCA sets out in the submission below measures to support entrepreneurship and address the scale up gap to bolster the UK’s pipeline of SMEs and groundbreaking businesses.
To incentivise genuine innovation and pioneering science and technology investment in the UK, the BVCA recommends that as a matter of priority to improve the existing environment, enhance UK competitiveness, and ensure the Government achieves its strategic objectives, the Government should:
The UK has a thriving tech ecosystem built on world-class research and development, a strong talent pool, and connectivity. These key factors position the UK as a global hub for technological advancement. However, boosting investment from UK pension funds into UK businesses is vital to drive up investment in key areas such as science and technology. The BVCA welcomes the Government’s commitment to increase investment from pension funds into UK markets and ensure workplace pension schemes take advantage of consolidation and scale.
Industrial Strategy
As the Committee referenced the forthcoming Industrial Strategy in its background to this inquiry, it is worth stating that the BVCA welcomed the Government’s Green Paper, Invest 2035, and our response to the Department for Business and Trade’s consultation on the Industrial Strategy can be found here.
The Industrial Strategy is a crucial part of the Government’s central growth mission, and its success will be measured by its ability to attract global capital and enable domestic investment. Much of that investment will come from private capital. Private capital backed businesses contribute 10% of all private sector GDP, and almost 1 in 10 private sector workers are in private capital backed companies. This means, to achieve its goals, the Government’s Industrial Strategy must look to maximise opportunities for the private equity and venture capital industry’s investment in UK businesses. Creating the right conditions for private capital investment can help businesses to grow, enhance UK productivity, and create the high-quality jobs that the UK desperately needs.
The BVCA’s submission on the Industrial Strategy made recommendations in the following areas which we believe are necessary for the successful design and delivery of the Government’s Industrial Strategy. These recommendations are likely to be relevant to the Committee’s inquiry, and are as follows:
Scaling UK science and technology
Question 1: Translating excellent basic science and technology into global companies has long been recognised as a problem for the UK. Many policy initiatives have tried to address this. What are the key barriers that the Government must address to fix this? What specific policies need to change? Why have previous attempts not succeeded?
The UK has a strong science and technology ecosystem, which in 2023 was the third most active and capital-intensive venture capital market in the world. The UK tech sector leads the way in Europe, with eight UK cities home to two unicorn companies or more including Manchester, Cambridge, Edinburgh, Leeds, Nottingham, Oxford, Bristol and London. It is important that the UK remains internationally competitive and establishes an environment that continues to support the innovative companies in these sectors as they grow, which is particularly important for technologies such as AI given wider geopolitical challenges.
There has been significant focus by government on ensuring that excellent scientific and technological innovation developed in the UK can be translated into world-leading companies. However, the BVCA has identified several barriers that limit the ability for innovative companies to scale up in the UK to become global companies, resulting in the UK falling behind other international jurisdictions. These include:
Further detail on the BVCA’s recommendations to address each of these barriers is outlined below.
Lessons from international comparators to address to the scale up gap
The UK faces a significant gap in scale-up funding resulting in many fast-growing businesses failing to grow. The UK has a strong funding ecosystem at the early stage, with data[1] from over the last 10 years showing that the average size of investments in new spinouts has increased, with growth of 111% from 2014 to 2023, bringing the average investment to £400m. However, as UK companies look to continue to grow from series B stage and beyond, investment is often found from the US and elsewhere as a result of the significant investment gap in the UK.
According to the British Business Bank’s (BBB) Small Business Finance Market report 2024, US companies receive 1.4 times more funding compared to UK companies at the late VC stage.[2] The BBB also recognise that there are significant funding gaps for research intensive sectors, which represented only 0.26% of GDP in 2019-2021.[3]
The BBB is the largest UK-based investor in UK VC funds and has committed £2.8 billion into 120 funds through its Enterprise Capital Funds programme and British Patient Capital. It also provides wider support through schemes such as Regional Angels and the Future Fund Breakthrough programme. The Government should expand support for the BBB with further funding and provide the Bank with a wider mandate. This will enable the BBB to continue to support UK companies from the start-up stage to scale-up, including growth equity and buyout funds that can take majority stakes in companies.
The European Investment Fund (EIF) had historically supported growth equity funds (growth and lower mid-market buyout funds) and had mandate to be a large cornerstone investor facilitating the first closing of a fund thereby giving momentum to the rest of the fundraise. Growth equity funds are often smaller UK-based funds investing largely, if not exclusively, in this country. They typically focus on small but high potential businesses and their model is one based on generating value through strategic and operational improvements through their equity stakes, not financial engineering. In reality, therefore, the distinction between such funds and large venture funds is somewhat artificial and there is a strong element of overlap in their ethos.
The mandate of the BBB should be widened to include growth equity funds, which give greater flexibility for returns (via secondaries, where an investor buys an existing asset or interest from another investor). We believe that this would also provide a route to regional lower mid-market managers being able to attract investment from LGPS pools. Given the plans set out in the Chancellor’s Mansion House speech to mandate the transfer of assets from LGPS funds to pools, we believe this is one way of countering the risks set out under Question 20. This will help drive much needed funding into stated government focus area such as Deep Tech and Life Sciences, aligning with the government’s Industrial strategy.
The BVCA has also considered the contribution that international initiatives such as the French Tibi Scheme has made to increasing to institutional investment into the private capital ecosystem. The French Tibi Scheme is a notable example of the role that pension schemes in particular can have in generating a domestic source of capital and increase investment into the French Tech ecosystem.
The Pensions & Private Capital Expert Panel (the Expert Panel) convened by the BVCA in partnership with the ABI and PLSA to identify the current barriers that limit UK DC pension scheme investment into private capital, specifically venture capital and growth equity funds and develop recommendations for policymakers, regulators and both industries to help facilitate this investment. The Expert Panel published its final report on 2 April with new recommendations for Government, industry and regulators to consider to help facilitate investment from UK DC pension schemes into venture capital and growth equity funds.
The Expert Panel’s final report recommended that the Government introduce a New Opportunities for Venture and growth Acceleration scheme (NOVA), emulating the French Tibi scheme. which secured c.€20bn of investment from French institutional investors to private capital funds investing in the French tech ecosystem
This would create a marketplace of accredited private capital funds for DC schemes, to facilitate investment, potentially focused on strategic sectors. A partnership between industry experts, the BBB, or other appropriate Government department or subsidiary, could act as the gatekeeper of a certified accreditation process.
The criteria for the French Tibi scheme formed a flexible framework for identifying French funds investing in the tech ecosystem. The NOVA scheme would have criteria around investment strategy, track record and experience with institutional investors. Fund terms and structures could also be required to fall within agreed ranges on areas like reporting, valuations and potentially other terms designed to mitigate DC-specific challenges. This could allow participating DC schemes to compare private capital fund opportunities from a pre-filtered pool and engage bi-laterally with those firms to discuss terms, structures etc. in more detail.
The gatekeeper/accreditation process, led by an appropriate Government department, would act as a qualifying kitemark for funds to participate in a NOVA scheme, with additional criteria relating to sector focus identified by Government. This could include the BBB and would likely need specific commitments from participating UK DC schemes to invest agreed amounts into funds on an extended list of ‘accredited’ private capital funds.
A UK scheme could be broadened to include LGPS schemes and other institutional investors, with the core investment objectives linked to the key sectors identified in the Government’s Industrial Strategy. The Government could set an initial target of several billion pounds, with a more ambitious longer-term target that scales as the scheme develops, in a similar way to the French Tibi scheme. This would reflect the amount of capital required to address the need (e.g. the scale-up gap) but over time, in a realistic, sustainable and strategic way.
Expand existing programmes to support companies particularly in the life sciences sector
The UK life sciences sector underpins high-value jobs, exports and innovation aligned with the government’s ambition to utilise the UK’s position as a global science and technology hub. However, the UK lacks sufficient domestic capital to support the life sciences sector, particularly at the growth stage, where this financing is critical.
There is an over-reliance on US crossover funds which leads to the offshoring of talent, IP and company listings. The Life Sciences Investment Programme (LSIP) was introduced to address this gap but is not yet delivering at scale.
The BVCA recommends further reform to the LSIP to enable it to support more fund managers and better serve companies at growth stage. This includes:
Expansion of eligibility to include newer, sector-specialist venture and growth equity managers, as well as generalist fund managers with a demonstrable track record or strong pipeline in life sciences.
Increase LSIP’s investment capacity and mandate to back from Seed/Series A through to pre-IPO rounds.
Introduction of flexible fund structures and co-investment models that align with modern market dynamics.
Streamline the application process with clear engagement points and published timelines.
This is a low-risk, high-reward reform that leverages existing infrastructure and will support the UK’s industrial strategy by anchoring scale-up capital within the UK ecosystem.
Ensure that the UK remains globally competitive to recruit talent and address the domestic skills shortage
The UK is a leader in sectors such as technological innovation, life sciences and financial services, but these industries need a strong talent pool with STEM skills to capitalise on global investment. Recruitment is often from a small pool of specialists and companies are required to look overseas for talent.
The current visa process is slow and can hamper a firm’s ability to hire the best minds to provide much needed expertise to commercialise. The UK is therefore losing out to other jurisdictions with a more efficient visa application process.
The BVCA welcomed the Government’s recent announcement to improve the Innovation Founder, Global Talent and High Potential Individual (HPI) visa route into the UK, as set out in the Home Office paper ‘Restoring Control over the Immigration System’. For the UK to attract internationally mobile talent, the BVCA welcomes the Government’s announcements to:
Increase the ease of use for skilled individuals in the science and technology sector to access the Global Talent visa.
Increase places on schemes for research interns working on technological innovation.
Ensure the Innovator Founder visa continues to support entrepreneurial talent.
Expand the HPI route to make it easier for the UK to attract internationally mobile talent.
Modernise EMI and growth share schemes to ensure they are fit for purpose in high-growth, science-based sectors.
The Government should review the current application process and identify where this could be made more efficient to ensure decisions are made within hours or days, rather than months. The BVCA looks forward to engaging with the Government following these announcements.
Domestic Skills Shortages
The BVCA and Public First established the Investment Commission to convene a range of experts representing investors, business leaders, academics, think tanks and business groups, to recommend changes that would result in a greater share of dry powder being invested in the UK.
To support its work, the Investment Commission conducted two surveys of BVCA members, held one-to-one interviews with senior investment professionals, and convened expert roundtable discussions on three specific themes: green transition and clean energy, the UK tech sector, and investment in the nations and regions of the UK. The Investment Commission identified seven barriers to investing in the UK, with skills shortages in the recruitment of their domestic workforce identified by investors as the single biggest issue for UK businesses they invest in, and a major factor in deciding not to invest in particular UK businesses.
These shortages will vary from sector to sector, but the people we spoke to were particularly concerned about difficulty in recruiting people with certain technical skills, from heat pump installation to the ability to use particular kinds of software. In some cases, they said they were in a position to attract people with the right skills from other sectors – for example, people who can move from real estate development to renewable energy development – but noted that those sectors were also nationally important and in need of the same skilled workers, pointing to a recruitment problem that goes beyond the needs of any specific business or investor or sector.
Support for skills training programmes that focus on particular skills gaps would make it easier for businesses to be confident that they can recruit the workers they need, and for investors to back them. Skills and talents are not just about the broad workforce that a business needs, but about specific leadership and business development skills. In the absence of domestic or local business leadership, this sometimes has to be brought in from overseas.
Management teams often lack some of the specific skills and expertise they need, especially in SMEs with limited resources, to deal with the newer challenges they are being asked to meet. To address domestic skills shortages, the BVCA recommends:
The BVCA welcomes the establishment of Skills England, which will help formulate a national understanding of the skills gaps that exist and how these can be addressed. This will contribute to the Government’s objective to achieve economic growth in alignment with the growth driving sectors set out in the Industrial Strategy. The BVCA looks forward to engaging with the Government as further detail is announced.
Strategic priorities for UK science and technology in a changing world
Question 2: How should the UK's science and technology strategy respond to ongoing major changes in the economic, geopolitical, and technological landscape? What challenges and opportunities now face the UK's science and technology sector? What policy actions would you prioritise?
The BVCA welcomes the UK science and technology strategy which provides a clear framework to help unlock scientific and technological innovation that can contribute to economic growth. It is important that the UK keeps pace with scientific and technological developments. The framework provides clarity on the critical levers including investment in research and development, talent and skills and financing innovative companies, that the government can utilise to deliver on its core priorities, and inform the upcoming Industrial Strategy.
To ensure that the UK’s science and technology strategy responds to ongoing changes across the economic, geopolitical and technological landscape, it is important that the UK establishes an environment that continues to support the innovative science and technology companies in these sectors as they grow, which is particularly critical for life sciences and technologies, such as AI.
Delivering economic growth has been a central feature of the Government’s agenda, with focus to unlock a domestic source of scale up capital through increasing UK DC pension scheme into private capital funds that support innovation and technological advancements at the core of this agenda. The UK now operates in an increasingly uncertain geopolitical environment with an increasing focus on enhancing its defence capabilities in response to this.
Investment into scientific and technological innovation can deliver economic growth and enhance the UK’s defence capabilities, which in turn would enhance the UK’s position internationally to mitigate against these challenges.
Increasing UK pension fund investment into private capital funds to deliver economic growth
The UK desperately needs greater levels of investment by UK pension funds into private capital; if we do not address this, UK businesses will continue to miss out on investment, notably scale-up capital. This can then be invested into UK businesses, driving economic growth and improving the retirement prospects of UK savers in this uncertain economic climate.
UK-based private capital investors tend towards a home bias, investing around half of the capital they manage in the UK without any regulatory requirement to do so. Currently, sixteen times more capital from pensions around the world goes into UK private capital than UK pensions capital. Canadian pension schemes most active in private capital investment typically allocate on average 21% of their capital to private equity, and major US schemes average around 14%. UK pension funds are investing less in private markets than comparable asset managers and focus by Government on increasing access to this capital for the UK’s fast-growing businesses is positive. In the UK, the launch of the Mansion House Compact in July 2023 reflected a commitment from 11 of the UK’s largest Defined Contribution (DC) schemes to commit to increasing the proportion of their DC default funds allocated to unlisted equities, with objective of allocating at least 5% of that capital to such assets by 2030. However a report on progress since the launch of the Compact showed that Compact signatories currently hold 0.36% of their funds in unlisted equities.
Greater access to more capital funding is crucial to supporting our most innovative businesses to grow and in the meantime, UK pension savers are currently missing out on the returns generated by private capital in the UK, which pension savers in other countries currently benefit from. It also means that UK businesses miss out on a domestic source of investment, notably scale-up capital that is required for these businesses to grow and remain in the UK. The Government recognised the importance of pension scheme investment into private equity can deliver better returns for savers in the long-term and boost investment in the UK, benefiting savers and communities in the Pension Investment Review interim report. The Government has committed to further reform of the LGPS to pool assets into eight pools or ‘mega funds’ run by professional fund managers to achieve increased investment.
Enhance the UK’s defence capabilities through increased defence spending
Ensuring that the UK remains a hub for technological innovation and investment is essential for bolstering the UK defence industry as it not only drives growth, but it will also enhance UK international competitiveness, provide homegrown advancements in critical industries such as defensive systems and cybersecurity, and enable the UK economy to adapt to risks and evolving geopolitical circumstances.
The UK regulatory framework must keep pace with technological advancements, while its R&D regime must actively encourage private capital investment in technology. This approach will help retain and expand UK innovation domestically, safeguarding the nation's economic and national security for the future.
The Government’s corporate venturing model, which has successfully been deployed by the National Security Strategic Investment Fund (NSSIF), should be expanded to other strategic sectors to align with the Industrial Strategy. This will help increase collaboration between Government, venture capital firms and innovative companies. This would also improve procurement processes and access to the latest technologies, which will be critical to achieving economic growth.
The NSSIF is now well established and has a strong track record of investing in funds and investing directly in companies. It is well respected by entrepreneurs and venture capital firms as it provides data and insights on emerging sectors as well as routes to procurement and commercial traction for startups.
Given that defence is one of the eight growth-driving sectors identified by the Government, and to ensure NSSIF continues to grow and diversify, its remit should be expanded to ensure it is able to partner with funds beyond those accredited by the BBB (as “NSSIF Fund Managers”), in order to build partnerships with other UK companies and funds in NATO or allied countries. To achieve this, NSSIF should be formally established as a separate entity to the BBB and be able to ring fence its own capital and recycle returns into new investments. NSSIF currently receives £100m annually to invest across its programmes.
Financing investment in science and technology
Question 3: Is the UK’s research and innovation landscape well-structured to support science and technology commercialisation, economic impact, and strategic advantage for the UK?
The UK has a strong track record in science and technology research but loses out on opportunities when companies move overseas, taking intellectual property, quality jobs, and innovation with them.
The UK is home to a world-leading university ecosystem developing scientific and technological advancements to a range of domestic and international challenges, from climate change to technologies that can be utilised by the National Heath Service. Supporting innovation and entrepreneurs through the commercialisation of Intellectual Property (IP) flooding out from UK universities through ‘spin-outs’, and keeping those businesses in the UK, is crucial to economic growth and creating jobs.
The stronger the UK can make the existing framework that supports the commercialisation of research, the stronger the domestic pipeline of promising businesses will become. The UK must utilise the opportunities available from the innovative research and development in the university ecosystem that will in turn strengthen domestic economic growth, and the UK’s position as an internationally competitive innovation ecosystem.
The Independent Review of the UK’s University Spin-out Companies identified several barriers that limit the commercialisation of research from the UK university ecosystem. This includes the slow and often complex process many spin-outs face when seeking investors to commercialise. This is often the result of the limited experience investors have with working on spin-outs and the delays caused when industry-standard terms are challenged. This differs across sectors, but life science spin-outs often have complex IP and need to source external executives to work here. The spin-out process is also inhibited by internal university sign-off processes which often do not involve commercial experts.
The Review found that the majority of spin-outs rely on equity investments to fund their development before they reach the commercialisation stage. This funding often comes from venture capital funds who not only provide capital but also commercial expertise. While some universities have established university investment funds and draw in support from the British Business Bank, the Review found that investment tended to be concentrated in London and the South-East, with those outside these regions particularly noting the challenges of obtaining investment. It is important that founders across all nations and regions of the UK have access to a strong pool of experienced investors to ensure research can commercialise and that, in turn, provides important economic opportunities in the local area. The Government should implement the findings of the Independent Review in full.
It is important to drive commercialisation through performance-based reform of University Tech Transfer Offices (TTO) maximising the return on public investment in research which is a core objective across DSIT, UKRI and HMT. While there have been improvements to TTOs, further support is needed to support the commercialisation of research given the highly variable capacity and process maturity. This limits deal flow and venture formation, and should be addressed to unlock the full potential of the UK’s science and technology research and development.
UCL’s Therapeutic Acceleration Support (TAS) programme provides a strong example of how targeted, non-dilutive funding can help academic projects become investable before company formation.
Managed by UCL’s Translational Research Office and funded by the MRC, TAS offers grants of up to £80,000 to help researchers generate intellectual property, validate targets, and produce early translational data. This enables TTOs to progress promising innovations that would otherwise remain too early for institutional investment.
Alongside additional support, stronger incentives, and clearer performance expectations would be beneficial. The BVCA recommends the implementation of a national framework to professionalise and support tech transfer. This includes:
Link translational and commercialisation funding (e.g. HEIF, UKRI) to performance benchmarks including spinout volume, deal speed and quality of investor engagement.
Incorporate commercialisation metrics into Research Excellence Framework (REF) and Knowledge Excellence Framework (KEF) to align research excellence with real-world impact.
Establish a dedicated spinout bridging finance facility to support ventures that are beyond grant support but not yet institutionally investable.
These modifications would build on existing university strengths, provide targeted capacity support, and ensure that the UK’s publicly funded research leads to scalable companies and economic growth.
Expand existing programmes and incentives
Government programmes and incentives that provide a much needed source of capital at the early stage should be expanded and simplified to enable research-driven and knowledge intensive companies (KICs) to continue development towards commercialisation. This includes:
Expand funding for and resources of both UKRI and Innovate UK with a focus on investor readiness, so that startups are better prepared to pitch for VC investment. The UK’s national innovation agency, Innovate UK is part of UK Research and Innovation (UKRI). It aims to help companies grow and commercialize while funding and supporting innovative projects, particularly in R&D intensive sectors. This includes several programmes such as Horizon Europe. Innovate UK also fosters collaboration with other Research organisations, government bodies or academic institutions to help strengthen UK’s position as the international Innovation hub.
The UK’s regulatory framework is often cited as a key challenge to enable effective speed to market for R&D commercialisation so it is positive that the government is setting up a new Regulatory Innovation Office. Regulatory checks are often cited as impacting investment activity. There are further challenges that are commonly cited as a barrier to R&D commercialisation including skills and talent. Innovative, research intensive companies often find hiring product management specialists and those with a strong customer perspective difficult.
Private sector investors, companies, and capital markets
Question 4: How can the Government encourage more private-sector investment in R&D, and in R&D intensive companies, including technology start-ups and scale-ups, in the UK? What are the major factors behind the exodus of capital and companies to the US, and is there anything that the UK can do to prevent this? We would welcome case studies from entrepreneurs or investors who have moved abroad, setting out their reasons for doing so.
There are a number of policy levers that Government can pull to unlock further private capital investment into R&D, including technology start-ups and scale-ups in the UK. R&D (research and development) tax relief plays a very important role in the companies that are backed by private capital, particularly in businesses that are at the cutting edge of innovation such as deeptech and life sciences. The UK economy needs these early-stage businesses to drive growth and employment for the future.
The relief provides an efficient way of supporting companies to reinvest in their future growth. It is particularly important for early-stage businesses in the period before they start to generate income, as the availability of a payable tax credit increases the length of their cash “runway” (the amount of time for which they can operate before they run out of money).
Ensure UK retains innovation through an internationally competitive R&D tax relief framework
Following reforms that came into effect from April 2024, there are two forms of R&D tax relief:
Feedback from our members indicates that there are significant concerns both over the amount of the relief, and the way in which it is administered by HMRC.
The amount of R&D relief, both under the merged and enhanced schemes, is significantly less generous than it was before changes that came into effect from April 2023. In the BVCA’s view, the Government needs to increase the amount of support available for R&D if the UK is not to lose out to competitor jurisdictions.
In addition, the existing R&D relief will only reach its intended targets if eligible companies are able to claim it. Our members’ experience indicates serious concerns about HMRC’s approach to checking that claims are valid:
This is causing significant disruption to many companies carrying out genuine innovative R&D activity.
We understand that HMRC’s current approach is largely a response to reports of large-scale fraud and error in R&D claims. The BVCA supports the Government’s aims to ensure the relief is properly targeted and to reduce fraud.
There are concerns about how HMRC calculate the amount of fraud and error. The problems we have described above often cause businesses to abandon valid R&D tax relief claims because of the burden involved in responding to HMRC’s enquiries. HMRC appear to classify a withdrawn claim as “incorrect”, which may be distorting their “fraud and error” figures.
Impact on the UK’s Life Sciences sector
This delay and uncertainty is undermining the effectiveness of R&D tax credits for early-stage life sciences companies. These companies often operate within long development timelines, across global structures without immediate revenue.
The targeted changes outlined above would improve UK competitiveness to attract innovation and investment in the UK and around the world.
The BVCA recommends targeted reforms for early-stage life sciences companies, including:
Clarification of eligibility rules for firms with overseas subsidiaries or cross-border research activities.
Establishment of a 30-day fast-track processing channel for pre-revenue firms.
Benchmark comparison of UK R&D tax credit impact against other global leaders in life sciences such as Australia and adjustments in the levels of support where needed.
To further improve the functionality of the regime, BVCA recommends:
The BVCA welcomed the Government’s Corporation Tax Roadmap 2024, which helps to provide policy certainty and confidence to investors looking to utilise R&D reliefs. This includes the Roadmap’s commitment to maintaining the generosity of rates for the merged R&D Expenditure Credit scheme and the Enhanced Support for R&D Intensive SMEs. Further announcements to enhance the administration of R&D reliefs by establishing the R&D expert advisory panel, continuing to improve signposting and guidance on R&D reliefs, and launching an R&D disclosure facility by the end of 2024 were also welcomed by the BVCA.
The BVCA previously recommend that the amount of R&D relief should be increased to incentivise genuine innovation and pioneering investment. This would also reduce the likelihood of capital and companies moving to other international jurisdictions with more attractive R&D tax regimes.
Expand existing government programmes and initiatives to support early-stage businesses
Government programmes and incentives provide a much-needed source of capital at the early-stage and should be expanded and simplified to enable research-driven and knowledge intensive companies (KICs) to continue their development towards commercialisation.
The BVCA recommends:
The UK’s regulatory framework is often cited as a key challenge to enable effective speed to market for R&D commercialisation so it is positive that the government is setting up a new Regulatory Innovation Office. Regulatory checks are often cited as impacting investment activity.
There are further challenges that are commonly cited as a barrier to R&D commercialisation including skills and talent. The BVCA has outlined considerations to address this in response to Question 1.
Innovative, research-intensive companies often find hiring product management specialists and those with a strong customer perspective difficult. Recruitment is often from a small pool of specialists and requires companies to look overseas for talent. The current visa process is slow and can hamper a firm’s ability to hire the best minds to provide much needed expertise to commercialise. The UK is therefore losing out to other jurisdictions with a more efficient visa application process. The Government should review the current application process and identify where this could be made more efficient to ensure decisions are made within hours or days, rather than months.
Institutional investors face barriers which limits investment in UK science and technology companies
The BVCA welcomes the clear commitment from the UK Government to achieving increased investment from UK pension funds into private capital through the creation of DC ‘megafunds’. The Pensions Investment Review and associated Pension Bill are encouraging steps in the right direction. We feel there is real urgency to the matter. The UK is lagging in comparison to its international counterparts. Over 85% of capital raised by private capital funds in 2023 came from overseas investors (£51bn out of £59bn). This rises to 97% when looking at fundraising from pension schemes (£16.2bn out of £16.7bn). Put another way, only 3% of the total pension funding committed to UK managed private capital funds in 2023 came from UK pension funds, despite the industry’s long track record of producing strong returns for investors. Given the evidence clearly showing that 50% of savers will meet the retirement income standards set by the 2005 Pensions Commission, we believe there needs to be change.
The BVCA has seen growing interest in private capital from increasing numbers of UK pension schemes, and private capital firms engaging on the matter: 11 of the largest pension providers signalled their ambition to allocate £50bn of their default capital to unlisted equities by 2030 as part of the Mansion House Compact in 2023, and over 100 private capital firms signed the Investment Compact for Venture Capital and Growth Equity the same year. However, as of July 2024, signatories to the Mansion House Compact held the equivalent of 0.36% of the total value of their DC default funds in unlisted equity assets (£793m of £219bn).
As outlined in question 1, the BVCA convened the Pensions & Private Capital Expert Panel published a series of recommendations for policymakers, key stakeholders and both industries to help facilitate investment. This includes Government support for a new programme that will increase opportunities for investing in venture and growth capital funds, and meet the needs of UK pension fund investors. Alongside the creation of NOVA, emulating the French Tibi Scheme, the Expert Panel also recommended:
The UK must retain its globally competitive financial regulatory framework to encourage scientific and technological innovation
The UK has a world-leading financial services industry and it is important that the UK remains a competitive environment to attract investment and continue to enhance technological innovation through its research and development ecosystem. It is important that while the opportunity to invest and adopt innovative technologies such as Artificial Intelligence (AI) is seized, any threat to financial stability and consumers is mitigated. The principle-based approach to the current regulatory framework for AI, aligned with the five areas; Safety, security and robustness; Appropriate transparency and explainability; Fairness; Accountability and governance; Contestability and redress, offers private capital firms an agile regulatory framework to facilitate the adoption of AI while mitigating any harm to consumers or financial stability.
This differs from the prescriptive requirements of the EU AI Act. It is important that regulation remains flexible to continue to support innovation, while the impact of new technologies for consumers and the wider economy is assessed.
Regulation must also be able to keep up with the pace of technological change. Government funded regulators should have funding that is fit for purpose given changing economic, societal and technological demands, alongside a commitment to annual, inflation-linked budget increases.
Many technology startups are working with innovative technologies – from AI to medical devices to quantum technology to driverless cars to novel foods – which are rightly subject to regulation but where their regulatory status is unclear, because regulations have not kept pace with what is now technologically possible. This makes it much more difficult for investors to understand what their return on investment is likely to be, whether a product has a path to market and how quickly it will get there, and indeed whether a business is viable at all.
In our BVCA member survey conducted under the Investment Commission with Public First, we found that 91% of respondents say a faster and more agile regulatory system would make it easier for them to invest in UK businesses.[4]
The FCA’s regulatory sandbox is a valuable tool for innovation and the adoption of new technologies, and enables regulated financial services firms to test their products in a controlled environment with guidance, mitigating risks and reducing uncertainty around compliance. The sandbox contributes to the UK’s position as a global leader in fintech, and the BVCA would welcome similar models implemented by other regulators to encourage innovation.
The BVCA previously welcomed the Government’s focus on enabling and supporting increased digital adoption, including technologies such as AI which have the potential to increase productivity and facilitate new products and services, and the need to ensure a robust and transparent regulatory framework that supports growth while maintaining financial stability.
Ensuring the UK remains a hub for technological innovation and investment is essential to drive economic growth. Being a leader in this space would enhance UK international competitiveness, provide homegrown advancements in critical industries such as defence and cybersecurity, and enable the UK economy to adapt to risks and evolving geopolitical circumstances. Some private capital firms have noted that the current definition of AI technology in scope of the National Security and Investment Act is too broad, resulting in many transactions falling into scope when there is minimal to no national security dimension. It is important that legislation strikes the right balance between protecting national security and encouraging investment into innovative technologies.
In order to capitalise on this, the UK must ensure its regulatory framework keeps pace with technological advancements, while its R&D regime must actively encourage private capital investment in technology. This approach will help retain and expand UK innovation domestically, safeguarding the nation's economic security for the future.
A responsive, innovation-enabling regulatory environment is central to attracting global investment, as set out in the Life Sciences Vision and DSIT’s pro-innovation regulation agenda.
Collaboration from regulators through forums such as the Digital Regulation Cooperation Forum (DRCF) help to foster a collaborative approach to the adoption of innovative technologies such as AI across the financial services industry. It is important that regulators continue to engage on any developments to the existing regulatory approach.
The BVCA recommends the establishment of a Life Sciences Regulatory Reform Taskforce under the Regulatory Innovation Office, with the following remit:
Publish target timelines for MHRA, HRA and NICE decisions, increasing transparency and accountability.
Pilot a regulatory sandbox for AI-enabled diagnostics and platform therapeutics, modelled on proven approaches in fintech.
Ensure that regulation keeps up with the pace of technological change through cross-regulatory collaboration on new and emerging sub-sectors.
Public sector late-stage investors
Question 5: Are the current major public sector investment vehicles, such as the National Wealth Fund, British Business Bank, and British Patient Capital, sufficiently resourced––in terms of capital, as well as scientific, technological, and financial expertise––to make meaningful scale-up investments in UK science and technology companies? Do they have the mandate to do this? If not, what changes or reforms would you propose?
The BBB plays a significant role crowding in regional and growth funding in the venture capital and tech investment ecosystem, as it does in supporting the pensions and growth agenda. The BBB is, and will continue to be, an important source of capital for businesses looking to start and scale up. It helps drive innovation, supports entrepreneurs and can help break down barriers to capital with programmes such as the Nations and Regions Investment Funds (NRIF), providing valuable support for innovative companies across the UK.
The BVCA has also outlined recommendations a series of proposals for the Government to consider as part of the Spending Review, to ensure the UK retains its innovative venture capital ecosystem and ensure businesses can scale-up in the UK:
Expand the BBB’s remit and programmes to cover growth capital funds
The BBB’s mandate and resources should be expanded as part of the 2025 Spending Review to match the EU’s EIF, which invests in smaller growth capital funds (not only venture capital funds). These growth capital funds are smaller private capital funds that invest in smaller UK companies, providing a much-needed source of capital to businesses across the UK to fulfil their potential; creating jobs, increasing productivity and delivering economic growth.
Growth capital funds that invest in the UK’s lower mid-market, provide support for more established UK companies than venture capital funds. These funds typically take majority ownership through equity injections, often without the use of debt to “buy out” existing shareholders. They are the archetype of the “active ownership” model of private capital investment and drive the growth of smaller UK businesses into local, regional and national champions. Overseas pensions and other institutional investors typically allocate a portion of their private capital investment programme to growth capital funds, alongside allocations to large global capital funds because they see this as key to delivering strong returns for savers and beneficiaries within a diversified private capital investment programme.
A growth capital fund’s investment strategy is typically to identify local businesses that, with private capital investment and operational support, can become national and international businesses of strategic importance whilst remaining headquartered in the regions where they were conceived. These companies are fast-growing, innovative, and form a critical part of the UK’s business growth and investment ecosystem, providing a pipeline of investment opportunities for larger investors and public markets.
The importance of this part of the market (where the amount one investor will typically commit to any one fund is £50m or below) is recognised by the EU, with the EIF providing multiple investments in smaller, EU-based growth capital funds on an annual basis (as it did in the UK prior to 2016. Since then, the BBB has not invested in this space).
Expanding the BBB’s remit to cover this segment of the market would:
The BVCA would be happy to share separately a sample of case studies relating to UK businesses that demonstrate the features and importance to the UK economy of small, growth companies backed by firms managing growth capital funds. We are also able to facilitate meetings and roundtable discussions with BVCA member firms and Government representatives.
Expand existing BBB programmes which have been successful in delivering investment across the UK
The BBB’s Nations and Regions Investment Funds
The BBB plays a significant role crowding in regional and growth funding in the venture capital and tech investment ecosystem, as it does in supporting the pensions and growth agenda. The BBB is, and will continue to be, an important source of capital for businesses looking to start and scale up. It helps drive innovation, support entrepreneurs and can help break down barriers to capital. The BBB’s Nations and Regions Investment Funds (NRIF) should be expanded to continue its valuable support for innovative companies across the UK.
The BBB’s Enterprise Capital Fund
The Enterprise Capital Fund (ECF) programme has been highly successful in catalysing many of the successful UK venture capital funds for the last 20 years. However, new and emerging managers still find it challenging to raise capital from Limited Partners, such as family offices or pension funds, with the majority of investment from LPs going to funds managed by larger or more established venture capital firms. These firms typically pursue more pan-European, less UK-focused investment strategies.
Venture capital funds that do receive ECF backing face a challenge when the funds have reached the maximum amount of ECF investment, but are too small to receive investment from British Patient Capital (BPC). For these venture capital firms, this effectively means losing their cornerstone investment from ECF in the fund, requiring the venture capital firm to find a new cornerstone LP investor. In some cases, these venture capital funds have had to look abroad to secure an overseas LP, who requires them to switch their investment focus away from the UK.
It is very important for the UK private capital investment ecosystem that the ECF continues to play a positive and active role in supporting new and emerging fund managers. Expanding the size and number of investments it can make will help to build the pipeline of future venture capital firms that want to grow in size and ambition, thereby enhancing the financing ecosystem for innovative early-stage UK companies.
National Wealth Fund
The success of the National Wealth Fund in mobilising private investment and subsequently stimulating economic growth is dependent on a number of factors. To successfully crowd in private investment, it is crucial that the NWF has a clear mandate, including how it will interact with other Public Finance Institutions. For our members, there is a lack of clarity as to whether the NWF remit is wider than infrastructure projects, and how it will interact with the British Business Bank, which has a proven track record of successfully investing alongside VCs.
To ensure the National Wealth Fund successfully mobilises private investment, the Government needs to play its role to encourage global investors to invest their capital into UK funds and ensure that investors have the confidence to back UK businesses. The success of the National Wealth Fund is highly dependent on the UK having the right regulatory and policy framework to attract private investment, which in turn can stimulate economic growth.
Further clarity on how the NWF will invest alongside the BBB and other public finance institutions would be beneficial for the private capital industry and contribute to the efficiency and success of NWF on how it complements existing public finance institutions. For example, the NWF could play an important role in investing in later stage tech deals alongside the BBB where there is a link to infrastructure or the NWF’s wider priorities. A successful example of this is the recent investment into Pragmatic Semiconductors by the NWF, alongside venture capital firms.
To contribute to the success of the NWF, the BVCA recommends:
Government must ensure that we have a policy environment which encourages global investors to invest their capital into UK funds and ensures that investors have the confidence to back UK businesses.
Measures are needed to address domestic skills shortages and support businesses in attracting global talent and high-skilled workers.
The ability of the NWF to move the dial on growth and, in particular, to crowd in private investment will be strongly linked to the Government ensuring that the LGPS, DC and DB investments all have the right conditions to invest more into private capital.
Whilst the NWF has an emphasis and funding focus on large-scale infrastructure projects, to truly bridge the funding gap, companies need more than just long-term infrastructural vision—they need timely access to capital.
The NWF should seek to crowd-in investment through blended finance mechanisms. It is, however, essential to develop effective use cases and understand which mechanisms work best for organisations of different sizes and sectors.
Crowding in investment
The NWF should seek to crowd-in investment through blended finance mechanisms. It is, however, essential to develop effective use cases and understand which mechanisms work best for organisations of different sizes and sectors. Current barriers to an effective blended finance market include capital requirements, tax issues, planning permissions, blended finance model complexities, policy uncertainties and inflexibility in project requirements.
To effectively harness the potential of blended finance and ensure it is crowding in investment, creating opportunities and reducing barriers to participation, the BVCA recommends:
· Eco-friendly production lines and clean technology manufacturing facilities;
· Large-scale renewable energy infrastructure, hydrogen production plants, and carbon capture projects;
· Green logistics hubs, sustainable industrial parks and integrated waste management systems.
· Circular economy innovations and next-generation clean technologies in industrial applications;
· Sector-specific or regionally targeted tax breaks to encourage sustainable investment.
· First-loss or junior equity tranches to attract institutional investors into climate-aligned funds.
Guidance and provision of blended tools and further alignment of financing structures with investment timelines to support with this, as mismatched timelines between project funding and project execution can lead to cash flow gaps, delays or project inefficiencies due to misaligned resource availability.
Ensure any investments are targeting industries and companies with high long-term potential but have a clear funding gap.
Ensure that investments are seeking to de-risk opportunities rather than create competition.
Ensure that government does not seek further financial obligations through loans to fund investments, thereby driving up interest rates and resulting in a crowding out of investment.
Ensure that a rigorous process is put in place to assess the potential risk and return of investments to ensure that future projects are as successful as possible.
[2] BBB Small Business Finance Market Report 2024
[3] BBB Small Business Finance Market Report 2024
[4] Adding Value, Delivering Growth - BVCA and Public First's Investment Commission Report