Julia Diez, head of UK productive assets at Railpen, calls for a UK-wide investment initiative to support pension schemes in investing in innovative, growing companies close to home.
The conversation around the significance of UK pension schemes investing in UK markets has accelerated. Initiatives such as the Mansion House Accord and Sterling 20 have sought to channel more long-term capital into UK growth, with private equity investment at the forefront.
Railpen is already deeply committed to investing in the UK, with around a third of its £34bn assets under management put to work in our domestic market.
Our investments in innovative companies such as IP Group, Oxford Nanopore, Starling Bank, and Cambridge Medical Robotics demonstrate how long-term, patient capital can help transform early-stage innovations into mature, globally competitive businesses. These are companies that have grown and scaled through a combination of capital, stewardship and strong governance.
“The UK’s private growth equity landscape suffers from persistent structural challenges [that] make it difficult to deploy capital efficiently and inhibit the UK’s ability to grow and retain world-class companies.”
Julia Diez, Railpen
Yet despite the UK’s strengths, its private growth equity landscape suffers from persistent structural challenges: illiquidity, a scarcity of scale-up investment capital, and fragmentation. These make it difficult for institutional investors to deploy capital efficiently and inhibit the UK’s ability to grow and, ultimately, retain world-class companies.
Venture capital and growth equity typically offer returns significantly higher than public equities on a risk-adjusted basis over the longer term. But for Railpen, returns are only one part of the equation. Our sustainable ownership approach emphasises high corporate governance standards, transparency, and alignment with long-term value creation.
These practices help build robust companies that can stand the test of time, critical for both investors and the broader economy.
But even with these clear benefits, there are risks and barriers that must be addressed.
Three key risks and constraints
1. Liquidity pressures
Investing in private companies often means committing funds for long periods, and it can be slow and complicated to exit if an asset doesn’t perform well. Meanwhile, founders increasingly have to accept reduced valuations, usually from foreign investors, in order to access capital and offer liquidity to existing stakeholders. As a result, the UK risks losing both value and influence over its most innovative firms.
2. A limited and fragmented deal pipeline
Institutional investors want to allocate more to UK private equity, yet the market remains too fractured, with too few companies able to secure the capital needed to scale.
Many promising firms fall into the ‘scale-up gap’: too advanced for venture capital, but too early-stage for traditional private equity. This bottleneck reduces the pool of investible opportunities and subsequently pushes high-potential companies abroad.
3. Capability and access challenges
Not all pension schemes have the internal resource or specialist capability to assess, price and monitor private equity deals. This creates an uneven playing field and limits the overall flow of domestic capital into scaling UK companies.
A UK scale-up fund: The opportunity
There are pragmatic, implementable solutions that could support a healthier, more investible UK private equity ecosystem. Central to these is the creation of a UK scale-up fund – a targeted intervention that aligns long-term institutional capital with the UK’s growth ambitions.
A national-scale fund, governed independently and backed by institutional investors, could transform the landscape by addressing the structural weaknesses outlined.
1. Improved liquidity and healthier valuations
A scale-up fund would provide founders with access to domestic patient capital, reducing dependence on distressed or heavily discounted overseas financing. This would support more robust valuations and should result in more value creation kept within the UK.
2. A stronger pipeline of investible opportunities
By backing companies through the critical scale-up phase, the fund would expand the number of UK businesses that ultimately become attractive to institutional investors. This helps build a sustainable, repeatable pipeline of high-quality opportunities, something the UK currently lacks.
3. Greater market access for smaller schemes
A pooled model facilitates participation in private equity for smaller pension schemes by offering enhanced diversification, collective due diligence, comprehensive risk assessment, and access to specialised expertise. This approach broadens access to private markets and contributes to improved outcomes for millions of savers.
4. Consistent high-governance stewardship
A scale-up fund can set clear standards for governance, transparency, and responsible business conduct among its portfolio companies. For long-term investors such as Railpen, this is crucial because companies with robust governance are typically more resilient, innovative, and better equipped to achieve sustained returns.
5. Strengthening UK competitiveness
Minimising the loss of innovative companies to foreign investors and markets – and helping them grow, create jobs, and go public in the UK – would significantly boost the economy. Pension schemes, which are designed for long-term investments, are especially suited to help achieve this goal.
Challenges and considerations for investors
A UK scale-up fund offers considerable potential. However, institutional investors will require greater clarity on several key aspects:
- Portfolio concentration and sector exposure
- Transparency of fees and competitiveness of cost structures
- Independence from political cycles
- Alignment of incentives and effective governance
- Well-defined exit strategies (IPO, secondary sale, or strategic acquisition)
Proactively addressing these considerations is crucial for establishing investor confidence.
“By implementing strategic reforms and creating a well-managed scale-up fund, the country could unlock much more value from its innovation pipeline and keep more economic benefits within its borders.”
Julia Diez, Raippen
Investing in private equity is an effective way to strengthen and grow the UK’s economy. It not only provides diversification and the possibility of higher returns, but also allows investors – when acting responsibly – to help build robust companies with the capacity to expand internationally.
However, the current market structure in the UK introduces obstacles that could be avoided. By implementing strategic reforms and creating a well-managed scale-up fund, the country could unlock much more value from its innovation pipeline and keep more economic benefits within its borders.
Pension funds like Railpen are ready to contribute. The challenge now is whether government policies will adapt to support the ambitions of the UK.
Julia Diez is head of UK productive assets at Railpen.
