The UK stands at a pivotal economic crossroads, with regulators, policymakers, and investors all wrestling with a pressing question: how to close the UK’s productive finance gap and channel more institutional capital into British growth companies.

 

Amid a protracted productivity puzzle and the threat of “value leakage” abroad, the country’s leaders are rolling out reforms aimed at unlocking productive finance and mobilising institutional capital to close the UK scale-up gap. But with foreign buyers circling and pension funds only slowly embracing private markets, the question is whether the UK can retain its best ideas and companies—or whether it will continue to watch them snapped up on the cheap.

 

 

For all its thriving ecosystem of start-ups, the UK stumbles precisely when companies are ready to scale. Even ambitious firms like Railpen, which already invests a third of its £34bn in assets in the UK domestic market, often find themselves too large for local venture funds but not big enough for traditional private equity, creating a scale-up gap in UK growth capital that has consistently exported high-potential businesses abroad. Rather than raising capital at home, founders frequently accept discounted takeovers from foreign or private equity buyers, costing the UK jobs, tax revenue, and intellectual property. The causes are interconnected—illiquid UK private markets, a fragmented deal pipeline and a lack of domestic patient capital all play a role. 

 

Yet some research suggests the appetite is there. Defined contribution (DC) schemes plan to access private markets via long-term asset funds (LTAFs), reflecting regulatory initiatives such as the Pension Schemes Bill and Mansion House Accord designed to channel more capital into UK-focused opportunities.

 

Additionally, the Local Government Pension Scheme (LGPS), which manages £400bn in assets, is backing new guidance from The Good Economy that sets out a strategic framework for place-based impact investing to unlock productive investments across the UK. Aligned with the government’s growth agenda, it calls for regionally tailored strategies, collaboration between pension pools, local authorities and private fund managers, and consistent impact measurement.

 

 

According to mallowstreet research on UK productive finance and place-based investing, most DC and LGPS investors agree that regional investment helps the UK economy, but fewer believe they have a role to play in driving local impact and growth. The strongest consensus sits around the principle rather than the practice: 80% agree that regional or place-based investments can strengthen local economies and support job creation. Yet this optimism narrows somewhat when returns enter the discussion, and just over half think investing in underserved regions can unlock growth potential overlooked by mainstream capital.

 

 

Despite growing policy momentum, most investors say government initiatives such as the Mansion House Accord and Fit for the Future consultation have limited influence on their strategies. Just 6% overall see policy as central, while 35% describe it as relevant but not decisive. 

 

Most pension funds remain guided primarily by performance and fiduciary duty.  For example, two-thirds of LGPS schemes say the Fit for the Future and related consultations are not currently considered in their investment strategy – and that it is not their role to address regional inequalities. The majority of DC schemes say the Mansion House Compact and Accord are relevant to their decision-making, but not central. 

 

 

 

With the Bank of England stress-testing private market resilience and the government pressing for bolder pension reform, the regulatory signal is clear, but UK asset owners are asking for a clearer, larger and investable pipeline.

 

Bridging the UK’s productive finance gap will depend not only on policy ambition but also on building credible opportunities that institutional investors can deploy capital into with confidence. If reforms can strengthen that pipeline—while maintaining strong governance, transparency and commercial discipline—pension capital could play a greater role in supporting British growth companies and innovation.