The missing UK unicorns: unlocking institutional capital for innovation

Executive summary

In this research paper, we study the UK’s venture capital “gap” and explore the reasons for it. UK asset owners have been historically under-allocated to venture capital (“VC”), but not due to a lack of understanding, an explanation that is often cited. Rather, the barriers have been that the market has rarely offered investable, scalable solutions. VC also comes with a significant fee burden compared to other assets, particularly when expenses and market beta are considered.

This has led to a system that nudges decision-makers toward what is easiest to implement—passive public equities and core private assets—rather than what best supports domestic innovation and potentially provides a path to higher returns. We also find the cost of this mismatch is real and measurable: UK companies have increasingly scaled with overseas money, and with that comes a steady export of ownership, future returns, and strategic capability.

Our evidence points to a feedback loop—limited domestic scale-up capital drives more foreign participation, which then captures more of the upside and further weakens the UK’s reinvestment cycle.

The paper sets out the mechanisms behind this (structures, intermediaries, culture, and risk appetite). We offer a practical pathway forward to overcome some of these challenges. Outlining how investors can move to listed small cap growth stocks through to growth equity and venture capital only where it genuinely fits—while keeping transparency and client outcomes front and centre.

A look to history

The private markets, by and large, have been out of reach for all but institutional investors and family offices in the UK. This is for good reason: there are rules aiming to prevent mis-selling and protect investors from opaque, thinly regulated products. The Prevention of Fraud (Investments) Act 1939 was created to shield the public from the widespread fraud and abusive securities promotion seen during the interwar period. Post-World War I there was a boom in share issuance (known as the Roaring Twenties) which occurred without a licensing framework for investment sales. The subsequent stock market crash of 1929 ushered in the Great Depression, which lasted for 10 years until the start of World War II. This is important context to keep in mind as we advocate for broader participation in UK private assets through this paper.

One of the institutional investors mentioned above, UK Defined Benefit (DB) pension schemes, have allocated in size to private markets, but that is not true for venture capital, something we expand on later. Below, we show the allocation of DB pensions (as a proportion of their equity investments) to UK equities and global private equity (NB, private equity in recent years is likely higher due to yield moves post-2021).

UK DB Schemes: Split of Equity Allocation to UK and Unquoted Equity

Source: The Purple Book 2025, PPF

While some of the largest corporate schemes will have dedicated internal teams running their assets, the vast majority are advised or outsource/delegate investment (to what is often called an OCIO or Outsourced Chief Investment Officer). To research and recommend a fund to their clients, consultants and OCIOs require a certain amount of capacity to: (1) make the effort worthwhile, (2) avoid scaling clients back significantly if demand exceeds available supply, and (3) avoid overdiversification/significant complexity caused by lots of small commitments. Capital-constrained strategies can also lead to other challenges, as smaller managers may not meet the high standards, particularly around operations, that institutional investors rightly demand.

The average venture capital fund has been too small to clear all of these hurdles (at around £100-£200m per vintage). Some of the larger brand-name VC managers are large enough, but demand for them has been high, so capacity is in short supply and/or (linked to this) they come with terms that are not palatable for many pension funds, such as high fees, ruling out fund-of-funds too. Using 2022 data, 59% of VC funds studied by Cambridge Associates had a tiered carried interest¹ structure, with carry stepping up one or two times to 25% or even 30%. Many funds come with no hurdle (making these very high fee when you consider market beta) and a management fee of 2.5% was most common.^2,3

When we add that venture capital has historically not outperformed private equity⁴ and the asset class has very high dispersion of returns, i.e. more risk if you select the wrong manager, we can begin to understand why UK institutions have little exposure.

We estimate that 0.5% or less of UK pension fund assets are invested in venture capital, outlined in the figure below. A significant portion of that is likely in US venture capital.

UK pension industry investment (2023)*Source: Pensions for Purpose, Venture & growth capital in Europe – mapping pension funds’ attitudes, and Fulcrum Asset Management LLP. *DWP; BVCA, LGPS Advisory Board – England and Wales, 2025, Investments and funding, viewed June 2025, https://lgpsboard.org/index.php/if24, Fulcrum Asset Management LLP. **Secondary data used to support this research often categorises VC as a subset of PE. Due to the difficulty in consistently obtaining data specific to VC allocations, we refer to PE when VC-specific data is unavailable. *** Estimated using Border to Coast.****DC schemes were the only group for which specific information on allocations to VC and growth funds was accessible. For the private DB schemes, only aggregated PE data, which includes VC, was available.

We include a similar table for the US below as a comparison. Private equity (not included here) allocations are significant, with an average allocation of 10% in public sector DB plans, for example.

US pension industry investment (2023)*Source: Pensions for Purpose and ici.org, ** IRA and Annuity Reserve allocations are unknown. ***https://abell.org/wp-content/uploads/2022/02/cd-2pensions1996.pdf. IRA = Individual Retirement Account.

It has become common to hear, post the publication of a BVCA expert panel report⁵, that pension funds have not allocated to VC due to “a lack of knowledge”. We do not find evidence for this. The industry has never tempted them with suitable strategies.

Across the UK wealth landscape, the story is a little different. There are significant tax incentives to fund early-stage businesses across the Enterprise Investment Scheme (EIS) and Seed EIS. These incentives mean early-stage investment is common amongst wealthier and more tax-savvy individuals. £1.5bn was raised via EIS and £0.2bn via SEIS over 2023-24, making this an important source of capital for many businesses. The more common private equity and closed-end commitment/drawdown vehicles have been out of reach for most outside of investment trusts. For good reason, too. The complexity of these vehicles can trip up even the most seasoned investment professionals.

Making comparisons: US > UK > Europe

The US has the deepest venture capital market globally; we would argue that this creates the conditions required to continually build the largest companies in the world. VC has played a huge role in the development of ecosystems like Silicon Valley – such knowledge hubs are vital to becoming the world-leader in a sector. The US invests significantly more of its GDP into venture capital which in turn attracts an oversized investment from global investors. This has resulted in $1.4tn less VC investment in EU headquartered companies compared to US over 2013-2022.⁶ Scaling VC investment by GDP is a way of normalising the differing sizes of economies and means we can make useful comparisons, as the graph below shows:

Capital invested as a share of GDP (%)

Sources: Stateofeuropeantech.com,  Atomico, Dealroom.co, Crunchbase, IMF. Data as of 30 September 2025. Full year extrapolated based on year to date data. United States includes OpenAI’s $40B fundraise, without this funding is 0.61%. Excludes the following: biotech, debt, lending capital, and grants.

The above chart implies that the investment needed to move the UK toward US-levels of capital investment is around £8.2bn ($11bn) per year. Master Trust AUM is expected to be £461bn ($618bn) by 2029⁷. Making some assumptions⁸, we can get to a plausible c.£1.9bn ($2.6bn) per annum investment to PE and VC from master trusts, or 0.07% of current GDP. If LGPS moved to a 3% weight consistent with the US, that adds another 0.09% of GDP, for a total of 0.51%, up from the 0.35% in the graph above. Our numbers might be somewhat of a stretch as some of these investors will be too large to do VC at scale for reasons outlined in this paper. Nevertheless, the capital would be revolutionary for the UK. Such a large shift will need to be done gradually over the long term; the VC ecosystem will need to expand to deal with the demand.

The Benefits

Drawing conclusions from across Europe, we find the lacklustre UK and European market vitality to be largely a capital allocation problem. Europe continues to create more companies per year than the US, owing to a larger population.  The graph below shows the percentage of companies that reach the “unicorn” ($1bn+ in value) milestone by amount raised, suggesting European talent is just as capable as the US at scaling a business. Therefore, improving access to capital should lead to more homegrown unicorns.

Share of companies that become “unicorns”, by total amount raised

Source: www.stateofeuropeantech.com. Based on Dealroom.co data as of 2025.

Given Europe is not behind on talent, the lack of funding is creating a significant lag in the number of companies ultimately achieving scale, shown by the chart below:

Counts of $10B+, $50B+, and $100B+ companies in Europe versus United States, 2025

Data is as of 30 September 2025. Latest valuations taken from public sources. Excludes the following: biotech, debt, lending capital, and grants. Source: www.stateofeuropeantech.com.

Who has been investing?

The largest funder of UK early-stage business is the government and government-linked entities, although aggregated figures are hard to find. To give some idea, again drawing conclusions from Europe, a little under 40%⁹ of VC fund commitments in 2023 were from government agencies, and Invest Europe also estimate 20-30% of deep tech investment (outside of VC fund commitments) come from a government entity, suggesting 50%+ of funding for some companies is government-linked. These numbers are for Europe as a whole. Moving UK-specific, pension funds account for only 10% of UK VC investment compared to 70% in the US.¹⁰

More than 60% of the value in today’s US public market comes from former VC-backed firms.

Source: Atlantic Vantage Point Capital

Overseas capital forms a significant portion of UK venture funding. In 2023, 87% of VC deals between £20m and £50m in value included overseas capital.¹¹ The US invests more in the UK by deal than any other country globally. 526 UK deals had US investment for the year to 27 October 2023. The runner-up was Canada with 306. Germany had 176.¹² Overseas capital is often a very positive development, providing the knowledge necessary for a company to scale in a new geography or partner with an overseas firm. However, the next graph shows the negative long-term effect of this when coupled with the lack of growth capital we see in the UK. Over half of the spin-out deals studied below – which are typically high in terms of intellectual property – were acquired by overseas investors. Unsurprisingly, given US participation in UK capital raises, most go to the United States (c.30% of the Listed companies are on the Nasdaq too).

Top nationalities of acquirers of UK spinouts by number of acquisitions (2015-H1 2025)

Source: Beauhurst, Parkwalk, Equity Investment Into Spinouts, 2025, Fulcrum Asset Management LLP.

Ex-founders are a crucial part of this ecosystem. Often, after an entrepreneur sells a business, they continue to invest in that sector, given their depth of knowledge. This could be directly or through funds. Many venture capital firms started with a successful entrepreneur applying their business-building skills more systematically (such as Founders Fund and Andreessen Horowitz). This is one of the reasons for the US having a deeper venture capital market: those who have achieved wealth reinvest in the ecosystem and continue to build new businesses.

Key Reasons The Scale-Up Gap Exists:

The quality of research across the UK (and Europe) is exceptional. The United Kingdom is sixth in the WIPO’s Global Innovation Index, with six of the top ten countries in Europe. When considering start-up vibrancy, the UK is second in StartupBlink’s 2025 Ecosystem report, with the US at the top spot.

If talent is not the reason holding investment back, what is?

1. Risk Aversion

Delegating to passive

There is a strong investment case to reduce the reliance on passive investing that has become so prevalent. Is there such a thing as “passive” anyway? By choosing an index like the MSCI All Countries World (ACWI), you are making a raft of non-passive decisions, inter alia: you don’t want any meaningful engagement with companies on your behalf, you are happy with a very large proportion of US technology stock, and you believe the passive flows will continue and US firms will keep getting bigger.¹³ Long-term investors should consider aspects like the benefit of voting, company engagement, manager engagement, and of building something more diversified, given 25% of the ACWI index is in 10 companies (and 64% in US equities). This trend may have started to unwind, with Trump’s tariffs leading many to reconsider investing so much in a single country. Mansion House, the Tibi Plan (a similar initiative in France), and the creation of the European Long-Term Investment Fund (ELTIF) structure are all encouraging a move away from passive for investors that have historically been large users. The second-order effects of passive investing are becoming better understood and prove to be eye-opening. We estimate that around 30p in every £1 of capital that leaves UK equities to go to a global passive mandate comes off UK GDP.¹⁴ This multiplier is significantly larger when considering a loss of venture capital funding. Could this be the biggest contributor to the UK’s stagnation, slowing productivity growth, and lacklustre IPO market?

Uncertainty & risk of loss

Early-stage VC is likely to be one of the riskiest allocations an investor will make. This uncertainty has been cited as a barrier. VC is often described as a “power law” industry (where a small number of winners offset a larger number of losers). Combining a portfolio of VC managers together diversifies this risk considerably, so long as they focus on different areas and you can control overlap (see graph below). This loss ratio can be further reduced by investing in more late-stage venture as well as reducing fees and expenses, making the bar for profit lower. In addition, university spinouts have a lower rate of failure compared to the average start-up, according to Beauhurst.

Probability of total loss

Source: The Risk Profiles of Private Equity, Weidig, Mathonet, 2004. Data: VentureXperts, Cochrane.

Capital allocation

VC is not a standalone asset class; it competes for capital not only with more liquid assets, but with infrastructure, real estate, natural capital, private credit, and private equity. All of these are typically cheaper and more liquid, often with regular cash flows. Those asking for capital to be invested in early-stage companies need to consider why an investor would allocate away from these asset classes, as we outlined earlier in this paper. In our opinion, the industry needs to adapt to attract this capital in size.

2. Access Issues

Asset owner consolidation

In our experience, consolidation does not lead to increased domestic investment. As asset owners scale, they naturally need to invest more in line with market cap. It may be surprising that UK asset owners are already more consolidated than US schemes¹⁵. Indeed, the UK Government finds the top 10 to be more consolidated in the UK than in the US, Canada, and Australia, too¹⁶. The UK’s LGPS are asking to pause consolidation,¹⁷ suggesting £125bn as the asset limit. We have outlined the small allocation to venture capital within these schemes currently. Some LGPS pools will soon be £100bn or more. The average VC fund in 2023¹⁸ had total commitments of £130m. At this size, a £100bn LGPS could take up all the committed capital of the average venture fund, and it would still only be 0.13% of assets if fully drawn. This is a key reason why we believe further inorganic consolidation is bad for UK scale-up capital.

Intermediaries & structures

• Long-Term Asset Funds (LTAF) offer a meaningful improvement in access, providing an FCA-regulated wrapper designed for long-term, less liquid assets, and can be used for DC and wealth channels under defined conditions. In practice, it helps standardise governance, reporting, and dealing terms versus ad hoc private fund arrangements. That said, the wrapper alone does not solve the underlying issues of valuation opacity, fee complexity, liquidity expectations, or the need for rigorous manager selection—it makes the “how” easier, the “what” still comes with substantial risk.
• Investment platforms, such as those used by DC pension schemes, are built for scalability, operational simplicity, daily dealing expectations, and on tight cost budgets. Private market strategies can struggle to fit, even LTAFs, given their heterogeneous terms. Even when the investment case is strong, implementation friction (unit pricing, cash management, member switching, communications, and operational resilience) can slow adoption. The result is that access is often limited to a narrow set of solutions on a given platform, rather than the best/widest opportunity set.
• Investment trusts can provide an accessible route into private assets, but the universe is skewed towards private equity and mature private credit with a US-bias, rather than true venture exposure. Investment trusts introduce public-market dynamics—discounts/premiums, accuracy of asset valuations, sentiment-driven volatility, and liquidity that can detach from the underlying NAV. Moreover, for institutions, fee negotiation is virtually impossible, and governance influence is limited, making them a blunt instrument to gain access.

Culture

• The Mansion House Compact and Accord have been important catalysts. They legitimise the conversation: signalling political backing, encouraging institutional coordination, creating momentum for new structures, better data, and product innovation. It is helping shift norms—making it easier for decision-makers to justify change and to invest in the governance required to do private markets properly.
• Herding is important to consider. UK institutions are highly sensitive to peer risk, given prior evidence of market herding behaviour which contributed to issues like the LDI crisis, the move to passive, and various carry trades that subsequently unwound (e.g. emerging market debt over the years). If few comparable schemes allocate meaningfully to venture, the perceived career risk of being early is high—especially given higher fees, lower liquidity, and more complex/uncertain outcomes. This “herding” dynamic can stop adoption even when the long-term case is compelling: the immediate downside (increased fees/volatility/illiquidity) is clearer than the long-term upside (innovation-driven compounding).
• Success stories matter because they create confidence, build internal capability, and encourage reinvestment. The US ecosystem benefits from decades of visible venture outcomes feeding back into the system: winners create endowments, founders become LPs, and institutions build durable programmes. The UK has successes, but they are less embedded in domestic portfolios and, too often, value creation is captured later by overseas capital. More repeatable UK “wins” would reduce perceived risk and increase willingness to allocate.
• The UK has historically been more effective using incentives (EIS/SEIS, innovation grants, British Business Bank participation) than mandates. That “carrot not stick” approach can work—particularly in wealth—but for pensions it may need to be paired with practical enablers: clearer guidance on value-for-money assessments, better standardisation/transparency of disclosure, and structures that fit DC operational realities. Done well, policy can reinforce long-term thinking without pushing investors into unwanted products.

Key risks

The table below summarises a few of the key risks as DC and wealth allocate to private markets for the first time.

Catalysts for Change:

The retail-oriented nature of DC pensions and wealth manager clients means changes are needed to the ‘standard model’ to bring VC and private markets to these investors at scale. The good news is progress has been made, but there is more to do.

Mansion House

While we have mentioned the Mansion House commitments already in this paper, we would note that the Accord’s aim of 5% in UK private markets covers a range of sectors, like real estate, infrastructure, natural capital, and as well as venture capital/private equity. Hence, the Accord does not automatically lead to an investment in venture capital.¹⁹

Governance & regulation

The Long-Term Asset Fund (LTAF) structure has provided a much-needed, regulated platform from which to offer DC and wealth private markets solutions. The structure is FCA-regulated and comes with the additional reporting and oversight required to allow a more retail investor base into these asset classes. Although we would note that significant due diligence is still required; in our opinion, even with an LTAF structure, the available universe remains too opaque and complex for the retail investor to understand. We wrote a guide on issues like this, linked here, for those who want to delve deeper.

Evolving the system

We can’t overstate enough the risk to both savers and our wider industry if providers are not transparent. This applies to a range of things, but most importantly, holdings and underlying fees. This has always been hard to achieve in the private markets. The answer to charging high fees is not to hide them: it is to design a suitable solution within cost budgets and then educate as to why that represents good value. Carried interest calculations are hard to understand, even for those in the finance community. Add to that other fees that might or might not be offset from the management fee, upfront deal fees, netting costs²⁰, carried interest on unrealised gains, and a low level of transparency on these is a recipe for disaster.

Steps to take

There is a strong long-term investment case to consider a UK overweight, which we describe in this paper. Below, we outline what a possible journey away from passive into higher growth companies might look like for an institution, should they wish to do this themselves. We do not discuss terms and fees here, but encourage asset owners to search the market for partners willing to work on their terms. Our research suggests that the standard fee terms lead to underwhelming net returns.

Step 1: Small Cap

Small cap mandates are the easiest first step and, in our view, offer good value currently. The AIM market (the growth sub-market of the London Stock Exchange) and Aquis/NEX (the European version of AIM) remain important capital raising and exit routes for UK growth businesses. AIM stocks attract no stamp duty, can be traded relatively easily, and count toward the Mansion House Accord if investors have committed. Compared to direct venture investments, a small cap allocation is both more liquid and cost-effective. This is an area where we recommend considering active managers given the low anayst coverage across the market, although there aren’t many UK small cap specialists left now following relentless market outflows.

Stock exchange by number of university spin-outs listed, 2015-H1 2026Source: Beauhurst, Parkwalk, Equity Investment Into Spinouts, 2025, Fulcrum Asset Management LLP.

Step 2: Public-to-Private & Late-Stage Venture

This is a part of the market that not many allocate to. Late-stage venture and pre-IPO companies tend to still exhibit strong growth, with an IPO providing a natural liquidity point. Public-to-private is where companies delist, usually through a private equity buyout, where they may offer some shareholders the option to continue to hold the company after delisting. We have seen mandates structured as a small cap/listed equity portfolio with opportunistic private company investments (to a limit) if investors want higher liquidity.

Fees here are typically lower than venture capital and growth equity, although if a listed allocation is included, they should be “unbundled” to understand the fee for the private and public allocations separately.

Step 3: Growth Equity

Growth equity strategies provide exposure to scaling companies with lower failure rates than early-stage VC, often with more predictable capital deployment and improved governance. Growth equity stakes are typically minority in nature in companies that are not profitable but can have strong, fast-growing revenue. Growth equity comes after venture capital in a company’s maturity, which naturally means the holding period is shorter, hence liquidity is higher. Fees are typically lower than venture capital.

Step 4: Venture Capital

Venture capital strategies provide exposure to early-stage companies with high growth potential but materially higher failure rates than growth equity. Investments are typically minority stakes in businesses that are pre-profit and often pre-revenue, with business models, markets, and management teams still being proven. Early-stage venture capital requires long holding periods—often 10 years or more—due to extended development timelines, resulting in significantly lower liquidity. Selling a small stake in an early-stage business can be hard.  Successful venture investing depends on access to broad, high-quality deal flow, as returns are driven by a small number of outsized winners. Fees are generally higher than growth equity, reflecting the higher company support required and lower capacity of these strategies. Investors should look to take a wide range of bets.

We believe there is a strong investment case for UK growth capital, compounded as more market participants look to access the excellent start-up ecosystem and intellectual property it holds. A number of asset managers have created LTAF strategies, often alongside other alternative asset classes, to facilitate access to these investments. LTAFs should not undermine investor protections and, in our opinion, should address the barriers investors face, outlined in this paper, when allocating to asset classes like venture capital. Safeguarding investor outcomes must remain paramount as access to private markets broadens, and regulation around access is relaxed.

Conclusion

The UK’s venture capital gap is not a failure of ambition or talent, but of structure, scale, and alignment. Without greater participation from long-term domestic investors, the UK risks continuing to export its most promising companies with their future returns and talent. We find in this paper that investing in US venture and growth capital because the market is larger with more examples of success is a case of putting the cart before the horse. The grass is greenest where you water it.

A rebalancing away from an excessive reliance on global passive strategies, combined with pragmatic, transparent access to growth assets, could materially strengthen the UK capital market ecosystem and provide excellent returns for participating investors.

The importance of AIM and the wider “growth” market infrastructure should not be underestimated. With the right capital in place, the UK (and Europe) has the foundations to rebuild a vibrant IPO pipeline and retain ownership of its most innovative businesses, for the benefit of local investors and citizens.