BVCA Submission to the Business and Trade Committee’s Call for Evidence: Financing the real economy

Summary

The UK has long faced a persistent underinvestment challenge, with the lowest share of investment in GDP in G7 countries during 24 of the last 30 years[1]. Despite having world-class universities, a thriving early-stage startup ecosystem, and the third-largest venture capital hub on the planet, the UK struggles to scale its most promising businesses. Increasing access to capital so that UK businesses can remain and grow in the UK and subsequently contribute to job creation, improved productivity and UK economic growth is essential to deliver higher living standards.

The investment gap

The UK excels at producing world-class startups but lacks sufficient later-stage capital to grow them into global leaders. With the right capital, policy, and industry leadership, the UK can lead in the age of AI and tech innovation, delivering long-term returns for savers and economic growth across the UK’s nations and region.[2]

The lack of scale up funding that currently exists in the UK often results in the UK losing out to other jurisdictions, as these innovative businesses often have to shift their focus towards other countries and regions, in order to acquire funding from international sources of capital, taking quality jobs, innovation and valuable intellectual property with them.

This shortfall has constrained the UK’s ability to modernise infrastructure, scale innovation, and transition to a net-zero economy. Often UK-founded companies are being forced to relocate abroad in the search for growth capital—taking jobs, intellectual property, and economic value with them.

Several factors underpin the UK’s investment gap, and its ability to translate research, development and innovation into companies that grow and remain in the UK. While the UK excels at generating high-potential startups —particularly from its leading universities— the lack of awareness and underutilisation of external sources of finance to support growth hinders these businesses’ ability to scale. This challenge is compounded by institutional investors often favouring low-risk, liquid assets over productive enterprise, alongside a wider range regulatory and tax regimes that hinder capital allocation and discourage long-term investment.

Private capital

Private capital sits in a unique place to help address this nationwide lack of investment. Already, the UK based industry has £190bn of dry powder funds sat waiting to be invested over the next three to five years. Historically, around half of the funds managed in the UK are deployed here. Unlocking billions in private capital could transform the UK’s economic trajectory—boosting productivity, creating high-quality jobs, and improving living standards.

The industry is already making strides, backing 13,000 businesses across the nations and regions of the UK, with nine in ten of those being small or medium-sized enterprises, the backbone of the economy. Collectively these businesses employ 2.5 million people across the UK and contribute 7% to GDP, showcasing the importance of the industry as a vehicle for investment in the “real economy”.

Unlocking UK pension funds

However, UK based private capital managers and the businesses they invest in do not receive sufficient investment from our institutional investors. Currently, despite their size, the UK’s pension funds invest very little in UK private capital. UK pension funds are investing less in private markets than comparable asset managers, including pension funds, in other countries. Indeed, sixteen times more capital from pensions around the world goes into UK private capital than UK capital[3].

The pensions and private capital industries are already working to identify solutions to the current barriers to investment through the Pensions & Private Capital Expert Panel, convened by the BVCA in partnership with the ABI and Pensions UK.​ As is the focus of the Pension Schemes Bill, consolidation and scale are vital to foster the increased investment expertise required to unlock the impressive returns of private capital. As of December 2024, UK private capital funds delivered 10-year horizon returns of 15.8% compared to 6.2% for the FTSE All Share and 8% for the MSCI Europe index. Not only would increased pension investment into private capital boost productive business investment, but also increase the returns of pension savers.

To facilitate increased private capital investment, reforms must address both supply and demand. On the supply side this should include regulatory flexibility for defined benefit schemes, fiscal incentives for domestic investment, and consolidation of pension schemes to enhance risk appetite. The Mansion House Compact and Accord are welcome steps but must be backed by clear incentives and accountability to ensure capital flows into UK growth assets.

Driving investment in UK assets

On the demand side, a robust pipeline of investable assets—particularly in climate tech, and life sciences— and ensuring regulatory clarity for emerging technologies is essential. The UK needs a coherent framework that connects its strengths—world-class research institutions, early-stage innovation, and global VC presence—with the capital required to scale, alongside a modernised tax regime that rewards risk-taking, capital gains tax changes, enhancing reliefs for scale-up investment, and simplifying R&D tax credits.

To compete in an ever increasingly competitive race for global capital investment, the UK must show it can leverage its unique national assets, such as the domestic private capital industry, to enhance its attractiveness to worldwide investors. With bold pension reform, a tax system that rewards risk, and a clear commitment to scale-up investment, the UK can close the investment gap and lead the next wave of global innovation.

Background - private capital in the UK

The British Private Equity and Venture Capital Association (BVCA) is the industry body and public policy advocate for the private equity, venture capital and private credit (together “private capital”) industry in the UK. With a membership of 600 firms, we represent the majority of UK-based private capital firms, as well as their professional advisers and investors.

In 2024, £29.4bn was invested by private capital into UK businesses in sectors across the UK economy, ranging from consumer products to emerging technology. This increased investment has fuelled the growth of businesses across the UK, with six in ten (58%) of the businesses backed in 2024 located outside of the capital.  These investments are long term, with an average investment period of six years, in contrast to less than a year in public markets. 

Private capital invests for a better future by developing innovative companies and delivering solutions to global problems: 

• Backing the UK’s best loved businesses: Private capital has revived and reinvigorated much-loved UK businesses like Hovis and Merlin Entertainment. 

• Developing the companies of the future: The UK is the third largest venture capital hub in the world, while three in ten of the UK’s 100 fastest growing companies were backed by private capital. 

• Delivering solutions to global problems: Private capital investors are key to backing the innovative UK firms developing sustainable solutions to challenges like net zero and climate change, with investment for the long term in companies like biofuel tech company Nova Pangaea Technologies and aerospace business Orbex, which has developed a low-carbon launch vehicle for the small satellite industry 

• Driving productivity throughout portfolios. Analysis shows that private capital’s active ownership model helps the businesses it backs become more productive. Private capital owners help to embed better management practices, provide accesses to technical expertise, business strategies and knowledge of supply chains.[4]

Is British investment too low—and why? 

Why has UK investment lagged so far behind peers for decades? 

Despite its strengths in innovation, research, and early-stage entrepreneurship, the UK has consistently lagged behind its international peers in overall investment levels. For much of the past three decades, the UK has recorded the lowest investment-to-GDP ratio among G7 nations. This persistent underinvestment has constrained productivity, limited economic growth, and weakened the UK’s ability to scale domestic innovation into globally competitive enterprises.

Several structural and policy factors underpin this investment gap:

• Scale-up capital deficit: The UK excels at generating startups—particularly from its world-class universities—but struggles to support these businesses through the scale-up phase. Many high-potential companies either fail to commercialise, sell prematurely, or relocate abroad to access growth capital, particularly in the US. This “valley of death” in the funding continuum remains a critical barrier to long-term value creation.
• Underutilisation of institutional capital: UK pension funds, especially Defined Contribution (DC) schemes, allocate significantly less capital to private markets than their international counterparts. While Canadian and US pension schemes invest heavily in private capital funds, UK schemes remain risk-averse, limiting their ability to support productive enterprise.
• Fragmentation and lack of scale: The UK pensions industry is highly fragmented, with many small DC schemes lacking the scale or expertise to invest directly in private capital. This limits access to diversified investment opportunities and reinforces a conservative investment culture.
• Regulatory and tax disincentives: The UK’s regulatory framework prioritises liquidity and short-term performance, discouraging long-term investment in unlisted equities and venture capital. Tax schemes such as EIS, VCT, and R&D credits have become outdated and less effective, while recent changes to capital gains tax have further reduced incentives for risk-taking.
• Missed strategic opportunities: Despite having the third-largest venture capital hub globally, the UK has not capitalised on the tech boom in the same way as the US. A lack of joined-up strategy between research institutions, capital providers, and scale-up support mechanisms has hindered the development of globally competitive tech firms.

To reverse this trend, the UK must implement bold reforms that unlock domestic capital, reward risk-taking, and build a coherent framework for scaling innovation. The Mansion House Compact and Accord are promising steps, but must be backed by accelerated pension reform, and a national strategy to retain and grow high-potential businesses. Without decisive action, the UK risks continued underperformance in investment and missed opportunities for economic leadership.

What is the scale of the investment shortfall, and how does it affect productivity, growth and wages? 

The UK faces a substantial investment shortfall, particularly in scale-up funding for innovative businesses. This shortfall is not merely a financial gap—it represents a structural barrier to economic dynamism, productivity gains, and wage growth. The current investment environment is not sufficiently fit for purpose, failing to attract and deploy private capital at the scale needed to support high-growth enterprises across the country.

One of the most telling indicators of this shortfall is the disparity in pension fund investment. UK pension schemes invest significantly less in private capital funds compared to their international counterparts. UK pension funds lag far behind, with sixteen times more global pension capital flowing into UK private markets than from UK pensions themselves. This underutilisation of domestic capital not only limits the growth potential of UK businesses but results in UK pension savers missing out on the returns generated by these innovative enterprises.

Moreover, the shortfall affects the broader economic cycle. Limited access to capital constrains business expansion, which in turn stifles job creation and wage growth. It also reduces the UK’s capacity to respond to national and global challenges, from healthcare innovation to cybersecurity and defence.

Recent initiatives like the Mansion House Compact and Accord signal a positive shift. These commitments from major UK Defined Contribution (DC) schemes aim to allocate up to 10% of default funds to private markets, with 5% directed specifically to UK private markets by 2030. If fully realised, this could significantly bolster the UK’s pipeline of SMEs and scale-ups, helping to close the investment gap and drive long-term economic growth.

The BVCA has called for the introduction of NOVA, which draws from France’s successful ‘Tibi’ Scheme to establish a marketplace of accredited private capital funds overseen by a partnership between the Government, the British Business Bank (BBB) and industry experts. This would directly address the challenge of scale and pace as it would create a delivery mechanism for the commitments made by pension schemes in the Mansion House Compact/Accord to deliver progress.

Tax and regulatory frameworks also play a critical role. The EMI, EIS, and VCT schemes were once effective tools for driving private capital into innovation, however they now require reform to reflect the realities of modern high-growth businesses. Similarly, the R&D tax credit regime, while valuable, needs simplification to eliminate cliff-edge effects and provide a more predictable environment for reinvestment.

A more agile and supportive regulatory system—highlighted by 91% of BVCA survey respondents as a key enabler—could help unlock this potential by making it easier for investors to commit capital to UK businesses.

In summary, the UK’s investment shortfall is a systemic issue with direct consequences for productivity, growth, and wages. Addressing it requires coordinated reforms across pension fund regulation, tax policy, and innovation support. Unlocking private capital—especially from domestic sources—is essential to ensuring that UK businesses can grow at home, generate high-quality employment, and deliver the innovations that will improve living standards for all.

Productivity

As per Public First’s analysis earlier this year, produced for the BVCA, the UK’s productivity growth has been poor since the financial crisis. It was already lower than in peer economies, and it hasn’t caught up. In 2024:

• The average German worker produced 9% more than a British worker.
• The average French worker produced 18% more.
• The average American worker produced 40% more.

Low productivity is a pivotal concern for small businesses in the UK, because it often reflects outdated equipment, inefficient processes, and limited access to expertise—all of which reduce competitiveness and limit growth. Closing the productivity gap will be essential if the Government is to kickstart economic growth and raise living standards in every corner of the UK.

Public First’s analysis shows that the British economy would be boosted by an estimated £100 billion by the end of this Parliament if businesses across the country achieved productivity growth comparable to private capital-backed firms. Private capital demonstrates how targeted investment drives innovation and efficiency; these are lessons that could be taken on board by policy makers, including in the upcoming Small Business Strategy, and the business community as a whole, to drive forward wider growth.

Private capital businesses operate an active ownership model which involves working with portfolio companies to improve management capability, operational efficiency and use of technology. The BVCA is calling on the Government to apply lessons of private capital’s active ownership model by providing support to SME leaders, removing barriers to productive investment, and using the British Business Bank and channelling pension fund investment to support future productivity champions:

• Upskill SME leaders: Encourage small and medium-sized enterprise (SME) leaders to adopt behaviours and practices that drive productivity, whilst supporting programmes such as Help to Grow which boost management capabilities, and organisations like Be the Business, Small Business Britain and Business Leader which create networks of high performing business leaders who share the ambition to improve their operations 
• Remove investment barriers: Address obstacles preventing businesses from making productive investments, through the likes of planning reform, to ensure that access to the resources needed for growth are available. 
• Support future productivity champions: Government should work with the private capital industry to help drive pension investment into venture capital and growth equity, whilst expanding support for the British Business Bank and creating new pension vehicles.  

How does the UK’s savings rate, corporate structure, or tax regime affect capital formation?

The UK’s tax regime has a significant impact on capital formation, its deployment, and how attractive the UK is to internationally mobile capital. Maintaining a stable and competitive tax framework can build investor confidence and enhance the UK’s position as an attractive environment to invest. This would encourage investment, innovation and help to address the scale-up gap.

Stable and competitive tax policies

Speculation about a ‘wealth tax’ has impacted investor confidence and would undermine the UK's competitiveness if introduced. The UK has a chance to go further in promoting investment both through continuing to drive forward reforms to pensions and wider capital markets, and through targeted tax changes.

As the current Government acknowledged in June, it is important that the tax treatment of carried interest is placed on a stable footing for the long term. There is a need to strike an appropriate balance between ensuring work carried out in the UK is fairly taxed, while preserving the UK’s competitive position as a global asset management hub. The UK must ensure it remains internationally competitive compared to its counterparts in the EU and other jurisdictions and must not be complacent.

A competitive tax environment is essential to supporting long-term investment and driving sustainable growth. Tax policy should be designed to incentivise patient capital and ensure the UK remains an attractive destination for private equity and venture capital. By fostering conditions that reward long-term commitment, the tax system can play a vital role in unlocking investment into innovative businesses and strategic sectors across the economy.

The EIS and VCT schemes

The EIS and VCT programmes are critical tools to drive private capital into UK innovation and scale-up. However, over recent years, the impact of these schemes has been weakened by outdated rules that no longer reflect the capital requirements, growth pathways or operational realities of modern high-growth businesses. 

Modernisation of the schemes is becoming increasingly important. It is now common for innovative companies to require £20-30 million before breakeven, with many Knowledge Intensive Companies (KICs) raising well beyond the current annual and lifetime caps before generating any revenue. With UK investors unable to follow on due to these limits, promising businesses are turning to overseas capital or relocating entirely – risking long-term displacement of UK-based talent, IP, and value creation. Modernising the investment thresholds for KICs would help close this funding gap, ensure the schemes remain globally competitive, and support the UK’s broader ambition to lead in frontier technology sectors.

Regional EIS and VCT funds are particularly constrained by restrictions such as the 7-year rule. This often limits access to access schemes as regional funds often take longer to reach the stage when they are able to receive institutional investment from VCs. Raising this limit would therefore provide more opportunities to scale up and grow across the nations and regions. The BVCA is calling for the Government to lift the EIS Knowledge Intensive Company upper limit, so R&D intensive IP rich companies in sectors such as biotech and deeptech can continue to raise capital would also help continue the development of innovative companies.

Research & Development

Research & Development tax credits play 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. They are an efficient way of supporting companies to reinvest in their future growth. The R&D tax relief regime is need of simplification, to reduce complexity and eliminate cliff-edge effects, ensuring a more predictable and supportive environment for businesses. 

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).

The EMI Scheme

The EMI scheme has been extremely effective in allowing SMEs to compete with larger firms, by giving their employees a material interest in the company. However, the scheme has not been reformed in 12 years, and later stage companies are facing recent changes to capital gains tax and reduced reliefs, like the Business Asset Disposal Relief.

What international models or policy frameworks offer lessons for the UK?

The UK can draw valuable lessons from international models that have successfully mobilised long-term capital into productive enterprise. The BVCA has identified several frameworks and practices that could inform UK policy reform to increase access to capital.

Countries such as Canada, Australia, and Sweden have demonstrated the power of pension-led investment in private markets. Canadian pension funds, for example, allocate over 20% of their portfolios to private equity and infrastructure, supporting domestic innovation and delivering strong returns for savers. In contrast, less than 0.5% of UK Defined Contribution (DC) pension assets are invested in unlisted UK equities such as venture capital and growth equity.

Despite strong intent from policymakers and industry, the scale of DC investment in venture and growth capital funds remains small. The pace of this investment also remains stubbornly slow, on a trajectory that is insufficient to meet either the Government’s nationwide growth ambitions or DC providers’ 2030 investment targets under the Mansion House Compact/Accord.

NOVA – lessons from the French Tibi Scheme

The New Opportunities for Venture and growth Acceleration proposal, or “NOVA”, is a proposed new marketplace to facilitate UK pensions investment into venture and growth capital funds. It draws on lessons from France’s Tibi scheme and is centred on the establishment of a marketplace of accredited private capital funds that would be overseen by a partnership between the Government, the British Business Bank (BBB) and other industry leaders.

Tibi has been successful channeling €20bn into the French tech sector from French investors through French funds in a short amount of time. There are two core elements central to its success – political commitment and a delivery mechanism in the form of a fund accreditation system.

Delivering on the Mansion House commitments

Bold action is required to increase investment, boost growth and help address the scale up gap facing high growth businesses, as well as provide better returns for UK pension savers. The Mansion House Compact and Accord signify a commitment from industry and the Government to facilitate investment from DC pensions into UK private markets, and venture and growth capital funds specifically. The active deployment of capital from DC pensions to private capital funds has been slow as many DC pensions face significant challenges.

The vast majority of Compact/Accord signatories and the wider DC market are still at a very early stage in developing strategies to invest in venture and growth capital funds and high growth companies. It can take many years to develop the necessary expertise and track record.

Central to NOVA is the creation of a fund accreditation process to deliver an investment pipeline of venture and growth capital fund opportunities for UK pensions, with Government facilitation at its core. This design element has been fundamental to the success of the Tibi scheme, which brought c.€20bn of institutional investment into French private capital funds investing in the French tech ecosystem.

In the UK, the Mansion House Compact/Accord represents a similar political commitment, but there is no UK equivalent of the French accreditation system that works as a delivery mechanism. NOVA brings this additional element.

How NOVA would help drive progress

NOVA would boost the scale and pace of DC investment into UK private markets, and venture and growth capital funds specifically. NOVA would also give DC schemes access to these investment opportunities via a trusted initiative and the chance to build teams and expertise directly.

With support from key stakeholders including the City of London Corporation and the British Business Bank, NOVA would help address the current gap and support investment leading up to 2030 and beyond.

A collaborative approach between industry, policymakers and the BBB

The cross-industry nature of NOVA will require collaboration from pension and private capital industry representatives, industry bodies and policymakers to develop an appropriate accreditation process and foster participation.

The BBB is a key stakeholder and we are working with the Bank to explore the proposal in more detail. Given experience with the British Growth Partnership and new remit the BBB can provide important relevant expertise. However, the NOVA proposal would go bigger and broader, aiming to capture investment opportunities beyond the current BBB focus, to include a wider potential range of UK venture and growth capital funds.

This collaboration should be based on the common aim of achieving the following:

• Confidence among pension schemes – ensure high-quality, expert and senior stakeholder involvement, including from experienced LPs, so that pension schemes are confident that NOVA accredited funds are high-potential investment opportunities that will help deliver their Mansion House commitments
• Fair process for private capital firms – to encourage private capital firms to engage, the NOVA process will need to be fair and transparent
• UK Government senior political support and practical participation - to drive progress, we need senior government support to secure momentum and investor commitment through to delivery
• British Business Bank support and practical participation – close involvement in NOVA of the BBB would be important because of the Bank’s expertise and understanding of the venture capital market.
• Driving investment into Industrial Strategy growth sectors – UK-based venture and growth capital firms invest extensively across the IS8, driving innovation, productivity and private SME growth in these sectors nationwide. NOVA directly connects the Government’s pensions policy to its wider growth policy.
• Bridge the “scale up gap” – help create larger UK-managed funds enabling UK firms to compete with overseas venture and growth capital funds (especially US funds) to lead later stage funding rounds for high-growth UK companies, which will extend the length of time that UK innovations remain UK-based.

Collaborative Investment Structures

International models also emphasise the importance of effective investment structures tailored to institutional investors. The BVCA’s Venture Capital Investment Compact commits UK VC and growth equity firms to work with pension providers to design structures that meet their needs, share best practices, and improve trustee capability through training and engagement.

This collaborative approach reflects successful frameworks in countries like the Netherlands and Denmark, where pension funds actively co-invest with private capital managers in scalable, high-growth sectors.

Standardised Legal and Governance Frameworks

The BVCA’s updated Model Documents for Early Stage Investments provide another example of international best practice.[5] These standardised legal templates—covering subscription agreements, shareholder rights, and governance—help reduce friction in early-stage investing and align investor protections with global norms. The inclusion of provisions for strategic investors, regulatory compliance, and anti-dilution mechanisms reflects a mature and internationally competitive investment environment.

To remain globally competitive, the UK must accelerate reforms that align with successful international models. This includes unlocking pension capital, simplifying investment structures, and adopting standardised legal frameworks that support innovation and scale-up. The BVCA’s initiatives offer a blueprint for how the UK can build a more dynamic and resilient investment ecosystem.

The suppliers of capital

Do UK institutional investors allocate sufficient capital to productive enterprise—and if not, what are the underlying reasons? / What constraints do pension funds, insurance companies, and sovereign wealth funds face when investing in UK growth assets? 

There is a significant opportunity to unlock greater investment into the UK economy. While recent government pension reforms and Mansion House commitments are welcome steps, progress remains slow. More decisive action is needed to accelerate the flow of capital into high-growth sectors and ensure the UK remains globally competitive.

The Government and the private capital industry are aligned in their interest in seeing more capital deployed into growing UK private companies. The easier it is for private capital firms to attract investors from the UK, EU and globally to draw in capital to UK-managed private capital funds, the more capital will become available to support UK innovation, adding to the 2.5m jobs and 7% of GDP that private capital-backed companies already contribute to the UK economy. For UK domestic investors in particular, the BVCA welcomes the Government’s focus on pensions investment and its recognition of the importance of private capital in delivering better outcomes for savers, as well as UK growth.

UK institutional investors, particularly pension funds, do not currently allocate sufficient capital to productive enterprise, especially in comparison to international peers. This underallocation is most pronounced in Defined Contribution (DC) pension schemes, which now dominate the UK pensions landscape. While Defined Benefit (DB) schemes historically invested more heavily in private capital, the shift to DC has led to a preference for safer, more liquid assets—resulting in a significant drop in investment into private equity, venture capital, and infrastructure.

The scale of the gap is stark. UK DC pension funds allocate only 0.5% to private equity and 3% to infrastructure, compared to 5% and 11% respectively in Australia and Canada.[6] This disparity means UK growth companies are missing out on critical scale-up capital, and UK savers are not from the higher returns that private capital investments can offer.

UK pension funds constitute only 2% of the capital raised by UK-managed funds on average (compared to typically around 30% from pension funds worldwide), while UK insurance companies constitute only 0.3% (compared to typically around 7% globally).

Typically, investors in other jurisdictions, particularly pension funds and insurers, invest more capital in their domestic markets and in private capital more broadly. There is substantial evidence that UK pension schemes and insurance companies are underinvested in private capital:

1. EU pension funds and insurers invest significantly larger amounts in private capital funds.
2. Insurance companies globally constituted 9% of the capital raised by European-managed funds in 2022.
3. Canadian pension schemes most active in private capital investment typically allocate on average 21% of their capital to private equity and the top US schemes average 14%.
4. As a whole US pension funds account for 11% of investment in US private capital funds.

Increasingly other countries are intervening to ensure their pension funds support local/private investments – for example, by incentivising certain types of investment through as a condition of capital gains exemptions (Italy), or giving relief on dividends on domestic investments (Australia).

Through the Pension Schemes Bill, and more broadly, the Government must take steps to ensure UK investors invest more in UK private capital funds. This will benefit UK savers and help UK private companies access the capital they need to grow.

Underlying reasons for underallocation

The BVCA convened the Pensions & Private Capital Expert Panel in partnership with the ABI and Pensions UK to identify the barriers that limit investment and identify solutions for industry, policymakers and other key stakeholders to consider. The Expert Panel identified several barriers that limit investment. This includes:

• Regulatory and structural barriers - The regulatory framework governing DC pensions prioritises liquidity and daily pricing, which discourages long-term investments in private markets. Additionally, fiduciary duties and risk aversion among trustees often lead to conservative asset allocation strategies.

• Fragmentation and lack of scale - The UK pensions sector is highly fragmented, with many small schemes lacking the scale to invest directly in private capital. This limits their ability to access diversified, professionally managed private equity funds.
• Limited familiarity and expertise - Many pension fund managers and trustees lack experience with private capital investments. This creates a knowledge gap and contributes to a perception of higher risk and complexity.
• Policy reform to meet objective -The BVCA has called for reforms to unlock capital, including consolidation of pension schemes and clearer guidance on private market investments.
• Market infrastructure and access - There is a need for better tools, platforms, and intermediaries to facilitate pension fund access to private capital. The BVCA’s Expert Panel has recommended new guidance and a government-backed investment programme to address this.

The Expert Panel also provided a number of recommendations in its Final Report, to facilitate investment into innovative UK businesses, including the following:

• The Government should introduce a new programme to accelerate DC investment in UK venture and growth capital funds, consisting of a private capital fund directory, a NOVA scheme emulating France’s Tibi scheme, and an ambitious fund-of-funds programme.
• The Government should progress with implementation of a Value for Money framework, and provide clarity on how it will interact with other policy initiatives.
• The FCA and TPR should act to ensure that the Value for Money framework does not make short-term investments a mandatory consideration for schemes serving longterm DC savers.
• The Government should revise its guidance on the application of the DC charge cap, to ensure that costs are disclosed in a comparable manner across both public and private market investments.
• The FCA should carry out a formal post-implementation review of the LTAF framework, once a greater number of LTAFs have come to market.
• Regulators should ensure that DC schemes have clear expectations around liquidity as the landscape evolves.
• The FCA should ensure the ‘permitted links’ rules are amended as soon as possible to widen private capital investment options for DC default schemes that use life insurance platforms.
• The Government should continue to consider how CDC, and any other risk pooling models, can continue to develop as the DC landscape evolves over the coming years.
• Private capital firms, DC schemes, trustees and advisers should consider the Expert Panel’s “Guidance for the RFP process” (see Annex 1), to inform commercial discussions about DC default investments in private capital funds.
• DC schemes, private capital firms and their advisers should consider the market insights on fee innovations set out in this report.
• UK DC schemes should consider lessons from the experience of Australian DC schemes, especially around: (i) the operational integration of carried interest/performance fees; (ii) building private capital teams; and (iii) balancing fund investments with co-investments.

Government-led support to increase investment will be critical to increase investment

Initiatives such as the Mansion House Compact and Accord signal growing recognition of the issue. These commitments aim to increase DC pension allocations to unlisted equities and UK private markets by 2030.

While UK institutional investors currently underallocate to productive enterprise, the barriers are well understood and actionable. With coordinated reform and industry engagement, there is significant potential to unlock billions in capital for UK growth companies—boosting innovation, job creation, and long-term returns for savers.

As outlined above, the Government has a role in supporting market participants to convene, share best practice and develop tools to help schemes meet those expectations.  The BVCA worked with stakeholders on the development of the NOVA following the publication of the Expert Panel’s final report.

Drawing on the success of the French Tibi Scheme, NOVA is a proposal for a new marketplace to facilitate pensions investment into private capital. This would create a marketplace of accredited private capital funds overseen by a partnership between the Government, the British Business Bank (BBB) and industry experts to boost the scale and pace of DC investment in this asset class. NOVA would address the challenges of scale and pace head on by creating a delivery mechanism for the commitments made by pension schemes in the Mansion House Compact/Accord to deliver progress.

How does the UK’s financial infrastructure—including equity and debt markets—support or hinder productive investment?

The UK’s financial infrastructure—including equity and debt markets—supports productive investment into a diverse private capital ecosystem in the UK. Different types of funds back different sized companies at different stages of their evolution, using different balances of equity and debt financing, but often working together to fuel growth in the same companies.

Private capital is particularly important in financing UK businesses, as it provides the long-term investment tailored to the needs of high-growth businesses, especially those underserved by traditional lending models.

According to the BVCA, private capital investment reached £29.4bn in 2024—a 44% increase from the previous year—demonstrating its growing role in supporting dynamic sectors such as technology and life sciences. This surge reflects the capacity of private markets to channel long-term capital into high-growth and innovative enterprises, often where traditional bank lending falls short.

However, structural challenges within the UK’s financial ecosystem can hinder productive investment. Many SMEs remain reluctant to take on external finance and lack the knowledge about the options available to them. This aversion to debt and limited access to equity financing restricts their ability to scale and innovate. Moreover, regulatory complexity and underdeveloped secondary markets—such as limited ratings coverage and liquidity—pose barriers to broader participation in venture capital and private equity. These issues can dampen investor confidence and reduce the efficiency of capital allocation.

Targeted reforms that improve access to diverse financing options, and strengthen market infrastructure, can unlock the full potential of private markets. As of the end of 2024, UK-based private capital specialists have raised £190bn of funds, known as dry powder, expected to be invested over the next three to five years. Historically, around half of the funds managed in or advised from the UK are put to work here. To drive economic growth, the UK must utilise the domestic pool of capital and attract international investment, both by encouraging investors to put their capital in UK funds and by ensuring that investors have the confidence to invest in the UK’s businesses and entrepreneurs.[7]

It is essential that the UK continues to be an internationally attractive destination for private capital investment, no matter the global economic backdrop. Enhancing transparency, reducing compliance burdens, and supporting finance for investments like R&D are key toward a more inclusive and productive financial system.

Background on the UK’s financial infrastructure – private capital

Companies turn to private equity funds (including venture and growth capital funds) for equity (i.e. ownership) investment. Equity investment allows and incentivises private equity firms to help their investee companies grow. This “active ownership” model is effectively a tightly aligned, long-term partnership between private equity firms and their portfolio companies, over six years or more. This supports those companies’ growth by, amongst other things, refocussing their strategies, implementing operational improvements, making strategic acquisitions and expanding into new geographies and markets. The capital provided under this partnership includes funding for the initial investment in (or acquisition of) a company by a fund, as well as “follow-on” investments of primary capital to help finance the company’s further growth (on average around 50% of all capital invested by private equity in 2023 was follow-on funding).

Private equity

Private equity investments typically support management buyouts and managing buy-ins in mature companies. In contrast to publicly-listed companies, which can often have thousands of shareholders, private equity firms work alongside the company’s management team to enhance the running of the business. This governance structure leads to much shorter lines of communication between the company’s owners and management team, ensuring closer engagement between the two.

This approach means the private equity firm will work alongside the company management team to enhance the value in the business. This can involve all areas of operation, from the top-line growth, efficiency savings, cash generation and procurement, to supply-chains, marketing and sales, improving reporting and human resources.

Such an approach becomes self-perpetuating and ingrained within the company, ensuring that the business remains committed to creating value and increasing growth even after the private equity fund has sold its stake.

Private equity firms will typically look to hold investments for between four and seven years, at which time they will look to sell, or ‘exit’, their fund’s stake, either on the stock market, to a corporate buyer or to another investor.

Venture capital

Venture capital provides finance and operational expertise for entrepreneurs and start-up companies, typically, although not exclusively, in technology-based sectors such as IT, life sciences and fintech. A key difference between private equity and venture capital comes down to the age of the company. Private equity will typically invest in a more mature company, one which is more established and may have been in operation for many years, sometimes decades.

Venture capital, by contrast, will invest in new companies. Many (if not most of which) will not yet be making a profit, have a disruptive business offering the potential of very fast growth. Businesses seek venture capital investment for a number of reasons, such as to grow their manufacturing and sales operations, enhance their product development and/or expand their business and hire new staff.

Many of the world’s best-known companies began life with venture capital funding. In the UK, this includes the likes of Deliveroo, Revolut and Darktrace, and globally household names such as Google, Uber and Nvidia all received venture backing in their early stages.

Venture capital funds take minority stakes in businesses, very often alongside other venture funds and investors. Early-stage companies raise money in ‘rounds’ - Series A, B, C etc - which will see further investment from either the same investors and/or new ones to support the company as it grows. Many start-ups will also receive funding prior to Series A, via angel investment, crowdfunding, grants, incubators or even friends and family.

Together, these form an ‘innovation ecosystem’. The funding chain that provides capital and business expertise to early-stage, fast-growing companies at different stages in a company’s life. Venture capital firms typically hold their investments for between five and seven years, at which point the business will either be floated on the stock exchange, or acquired by a multinational corporation or another investor such as a private equity fund.

Private credit

Private credit funds support SME growth in a very similar manner, alongside and in partnership with private equity funds. They provide the same, private equity-backed SMEs with financing for the initial investment or acquisition by a private equity fund, as well as direct, follow-on investment to fuel further business growth. Private credit firms are similarly aligned with the active ownership model, have a similarly deep understanding of those businesses’ growth models, and a share similarly patient and flexible outlook, aligned towards driving the companies’ long-term growth. The private credit industry also includes specialist venture debt funds, which provide additional capital in venture funding rounds, help fuel fast-growing companies’ growth between funding rounds, and in some cases support fast-growing companies independently of the venture capital ecosystem.

These are all types of private company lending that have grown significantly in the last 15 years, as regulation and commercial factors have made it harder for many banks to lend to various types of company, especially high growth companies and SMEs. Private credit investment is specifically tailored to the needs of the borrower to support its growth and expansion, without significantly altering a company’s ownership structure.

Private credit in the UK has grown rapidly over the past decade, emerging as a vital alternative to traditional bank lending. Once considered “alternative finance,” it now competes directly with banks, especially in leveraged buyouts, refinancings, and bespoke financing arrangements.

The market has expanded significantly, driven by institutional investors seeking higher yields and businesses needing flexible capital solutions. The UK private credit market holds $225 billion in assets under management, making it one of the most developed private credit markets in Europe.

In the UK, private credit plays a key role in financing middle-market and higher-risk borrowers, filling gaps left by regulatory constraints on banks. While generally unregulated, non-bank lenders must navigate UK-specific legal considerations depending on deal structure. UK-focused deployment reflects growing demand from mid-market borrowers, particularly in sectors underserved by banks.

Overall, private credit continues to reshape the UK’s financial landscape, offering speed, flexibility, and tailored financing options for a wide range of borrowers.

Key characteristics of private credit are as follows:

• Private credit fills a structural gap left by banks and vital for growth, particularly for SMES, IP-rich startups, and high growth companies that don’t fit traditional lending models.
• It enhances economic resilience by providing stable, long-term finance that does not depend on deposit funding or short-term liquidity, avoiding run risks seen in banks and liquid markets
• Private credit is not a systemic risk as capital is typically locked up, investor diligence is high, and the sector is subject to regulatory and contractual oversight.
• It complements, not competes with, the banking system, with growing partnerships that diversify risk and support credit access
• Transparency is evolving, with managers already reporting to regulators, investors and ratings agencies. Any calls for data should support informed oversight, not duplicate what investors already receive.
• The sector is evolving responsibly in response to investor demand, economic need, and regulatory engagement
• Private capital has a strong track-record with the industry proving resilient across COVID, inflationary shocks, and interest rate hikes, without triggering instability.

What reforms could enhance the UK’s attractiveness as a destination for global capital, particularly from patient or long-term investors? / How do UK tax policies, regulatory frameworks, and risk management practices influence investor behaviour and capital allocation?

Introducing a ‘NOVA’ (New Opportunities for Venture and growth Acceleration) scheme

The Government also has a role in supporting market participants to convene, share best practice and develop tools to help schemes meet those expectations. As mentioned earlier in this submission, the BVCA has been working with stakeholders over the past few months on the development of the NOVA - a proposal for a new marketplace way to facilitate pensions investment into private capital. NOVA would address the challenges of scale and pace head on by creating a delivery mechanism for the commitments made by pension schemes in the Mansion House Compact/Accord to deliver progress.

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 prefiltered 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. 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

Regulatory change that’s pro growth

The UK is currently home to one of the largest private capital hubs in the world, second only to the USA. Key to the UK’s success in attracting private capital firms and global institutional investment capital over the last forty years has been its stable and robust regulatory framework. The UK’s regulatory environment has been competitive and in line with the international standards demanded by global institutional investors. To preserve the UK’s position as a global hub for private capital management and investment activity, the regulatory regime must adapt to remain effective and attractive.

Broadly, the BVCA would like to see regulators develop a more competitive mindset and do more to balance oversight with flexibility to enhance proportionality, holding firms to high standards and maintaining market stability without unduly constraining market activity. It would also mean monitoring international competitor regimes, not only to respond to changes to ensure the UK regime remains effective and competitive, but also to maintain regulatory alignment where needed to preserve the UK’s position as a global hub for private capital, private credit and venture debt (e.g. for market access or dual regulation reasons).

A more competitive mindset within the regulator will make the UK more attractive to international firms, investors and talent – which will help to drive sustainable growth of the UK economy. We also believe that enhanced coordination between regulators and legislators is essential for ensuring a stable, effective and competitive regulatory system in the UK.

The private capital investment model is straightforward (raising funds, investing them over several years in unlisted companies, using their influence to improve those companies to generate returns for investors on exit). However, the technical “plumbing” behind this activity is often extremely complex because private capital needs to accommodate different types of investors from around the world. The private capital industry will only remain attracted to the UK if the country’s tax, legal and regulatory frameworks for private capital fund management are flexible enough to allow capital to flow efficiently through UK structures, while maintaining robust standards demanded by the most sophisticated institutional investors in the world.

Stable tax frameworks

Maintaining a stable and competitive tax framework will build investor confidence and enhance the UK’s position as an attractive environment to invest. This would encourage investment, innovation and help to address the scale-up gap. The UK has a chance to go further in promoting investment both through continuing to drive forward reforms to pensions and wider capital markets, and through targeted tax changes.

UK tax policy plays a significant role in shaping the behaviour of private capital investors and influencing how capital is allocated across sectors and geographies. Investor confidence is shaped by the predictability and stability of tax policy.

Developing scale ups across the UK

Research & Development tax credits play 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. They are an efficient way of supporting companies to reinvest in their future growth. The R&D tax relief regime is need of simplification, to reduce complexity and eliminate cliff-edge effects, ensuring a more predictable and supportive environment for businesses. 

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).

Targeted incentives such as the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts (VCT) and R&D tax reliefs continue to influence capital allocation. These schemes offer income and capital gains tax reliefs to investors backing early-stage and innovative companies, making them attractive vehicles for venture capital and angel investors.

However, increased scrutiny and administrative burdens—especially around R&D claims—have led some investors to discount these benefits during due diligence, particularly if HMRC compliance checks are ongoing. As a result, tax policy not only affects the economics of investment but also the perceived risk and timing of returns.