Imagine you owned a farm, the most fertile of any farm on the planet. Seeds, once planted, sprouted vigorously in the soil suggesting a bountiful harvest to come. Yet the bounty never came. Year after year, seedlings failed to grow due to a lack of water or were picked off by scavenging birds from afar.
Adjoining the fertile fields was a deep reservoir of water sufficient to irrigate the farm. But whereas once more than half of the water had flowed, today it had slowed to a trickle. Without an effective irrigation system, the harvest had collapsed and the farm had faced mounting debts and deficits.
You will probably recognise this farm. It isn’t Clarkson’s. It is ours – the UK economy. Its lack of growth success, despite our seed-corn of brilliant businesses, is the subject of my opening remarks. And reversing this tragedy – in other words, growing our economy by unleashing the potential of those businesses – is the subject of today’s conference.
You will hear a lot today, including from political leaders, about what has gone wrong in the past and what might be done differently in future to get growth going. But I want to leave this audience in absolutely no doubt about three basic – but fundamental – facts about the UK’s growth prospects:
- First, the UK has huge natural advantages when it comes to its pipeline of innovative, high-growth businesses, many the envy of the world and most whose potential remains largely unfulfilled;
- Second, the UK has an enviably position too when it comes to its deep reservoir of patient capital, primed for jet-propelling these businesses, though at present this is also largely untapped; and
- Third, I want to suggest what more might be done to unlock the potential in both British business and in British capital – two of our greatest assets – by more radically replumbing the two together.
I am calling this speech Field of Dreams. But unleashing business and, with it, growth is far from a dream. For the UK, it could and should become a reality. This will require, however, a reconfiguration of our eco-system. If we re-build this, growth will come. Here’s how.
The UK’s Business Seed-Corn
The UK has long been lauded as an “innovation nation”. The home of the first Industrial Revolution and so many inventions and inventors – from Watt to Whittle, from Fleming to Turing, from Logie-Baird to Berners-Lee. Yet the question too often posed these days, with growth and productivity weak, is whether we have lost that innovative edge, that entrepreneurial spark.
My answer is a resounding no. The facts speak for themselves. We remain home to four of the world’s top 10 universities. In Global Innovation Indices, we consistently rank in the top five and in the top three for start-ups and unicorns. The best British businesses outperform, in productivity terms, their international counterparts. The UK’s innovation spark remains ablaze.
What matters for growth ultimately, though, is the commercialisation of this innovation, the journey from start-up to scale-up, translational as well as primary research. Historically, scale-up has always been the engine of growth, job and productivity creation.
The five largest companies in the world today were venture capital start-ups which did not even exist 50 years ago. Put differently, the UK’s 10 largest companies are over a hundred years older than the average age of the US’s 10 largest companies. This diagnostic does not reflect well on the UK’s business dynamism.
Yet the irony here is that the UK’s pipeline of fast-growing scale-ups – the pre-unicorns, if you like – could hardly be stronger. Continuing the equine metaphor, Saul Klein at Phoenix Capital has termed these early-stage, VC-backed companies the UK’s colts (with revenues between $25-100 million) and thoroughbreds (with revenues in excess of $100 million).
Klein has identified in excess of 1,500 of these colts and thoroughbreds across the UK. That would place the UK third in the global league table of high-growth businesses by absolute number. On a per capita basis, it would place the UK as one of, if not the, most innovative business eco-system on the planet – a genuinely “innovation nation”.
You might think this success was clustered geographically in the Golden Triangle. And you’d be wrong. Interestingly, the colts and thoroughbreds are spread across all four corners of the UK. There are more colts and thoroughbreds in Leeds than in Cambridge, in Manchester than in Oxford. By growing them, we would fire growth in every corner of the UK.
You might also expect these businesses to be concentrated in a small number of super-star sectors. And again you’d largely be wrong. These high-growth UK businesses span a wide range of sectors – from advanced materials to clean energy, from photonics to genomics, from neurotech to fintech.
Yet the fruits of that pipeline have plainly not shown up in UK growth – or at least not yet. Why? Because too many of these high-potential companies have failed to fulfil it due to a lack of access to scale-up finance or have been lost to overseas investors. We have become what Stephen Welton at the British Business Bank has called an “incubator economy”.
This is not a new problem. The UK’s scale-up problem, its “death valley” for businesses, has existed for over a century. But the costs of not irrigating death valley feel particularly acute today, with UK growth weak and with the pipeline of brilliant British businesses so plentiful as we sit on the cusp of an AI-powered fourth industrial revolution.
Will Hutton at The Purposeful Company has identified around 1,700 high-growth British scale-ups that have been sold to foreign investors in the past 15 years alone. He estimates the loss of value to the UK from that divestment to be around £1 trillion. This is not a loss, or opportunity cost, we can tolerate for the next 15 years.
And this problem is not confined to private start-ups and scale-ups. It is being felt too by established companies trading on public markets. The UK has lost over 100 listed companies with a market cap over £100 million since 2024. So far this year alone, there have been overseas bids for a further 20 large, listed UK companies, including 4 within the FTSE-100 – almost double last year’s level and the highest since the GFC.
The UK should of course remain open to FDI. But we simply cannot afford to allow the continuation of overseas stripping of our greatest growth asset – innovative businesses – on this scale. Doing so is tantamount to willingly sacrificing the growth and jobs of tomorrow. Competing in the world means winning your winners. At present, too many of the UK’s are being lost.
If the key barrier to germinating and growing this seed-corn of brilliant businesses is a shortage of patient, domestic capital, what can be done to lower this barrier?
The UK’s Financial Reservoir
Here’s the irony. The world is awash with cash. Private money is plentiful. The pool of global financial assets stands at around $500 trillion. As it roams around the planet seeking a high-return home, this wall of money is what is driving global stock markets to all-time highs.
Less well appreciated is the fact that the UK’s pool of patient capital is also deep, more than adequate to finance Business Britain. UK households hold gross financial assets of around £9 trillion, three times annual GDP. Of this, more than £2 trillion sits in bank accounts and around £6 trillion in pension fund and other investments, such as ISAs.
So how much of this vast pool of household capital is re-cycled to support British businesses, both the pipeline of fast-growing and innovative scale-ups and larger established public companies? The short answer is far too little, in my estimation probably less than 5%.
Let’s start with the good news. By European standards, the UK has a deep and liquid venture capital pool supporting scale-up, totalling in excess of £100 billion – larger than Germany and France combined. But that still makes it only a tenth the size of the US venture capital market. More importantly, it is only around 1-2% of UK household wealth.
So how could this pool be augmented? The second largest pool of household money sits in bank deposit accounts. But, by and large, that £2 trillion reservoir of household deposits are not being recycled into British businesses. Take this fact: since the GFC, there has not been a single penny of net new lending to UK SMEs by British banks.
Bank debt is not the right financing option for firms during scale-up. But for early and some later-stage businesses, it can be. And the loss is not just felt by business. Because the majority of household bank deposits yield negative inflation-adjusted returns, British savers are missing out too.
If we turn to household pensions, the picture is no better. In 2000, over half of UK pension assets went into UK equities. Today, it is less than 5%. In money terms, that is a divestment from UK companies of more than £2.5 trillion – roughly the market cap of every UK-headquartered listed company.
The reasons for this seismic portfolio shift by institutional investors are well-known: a flight to safety, in particular into increased holdings of Government bonds; and a flight to passivity through index-tracking of global market indices, where the weight of UK companies is modest.
We see these same patterns in households’ ISA investments. These total around £0.8 trillion – multiples of the UK venture capital market. But most ISA investments are either into cash (around a third) or global index trackers (a third or more), leaving a minority invested in UK companies.
Adding up across different sources, then, this leaves only around 5% of the total pool of household financial assets invested in British companies. The vast majority is financing overseas companies or domestic and foreign Governments. That was not the case in the UK’s relatively recent past.
And nor is it the case in other countries. Pension funds in Canada, Australia, Japan and across Europe invest between 20-40% of their assets in domestic companies. This is many multiples of their global market share – what is sometimes called a “home bias”.
The most striking thing about the UK’s large and mature pension system is that it is only system in the world without a home bias. It is the ultimate irony that Canadian, Dutch and Australian pension funds today invest more in brilliant Brish businesses than do UK pension funds.
Re-Plumbing for Growth
So we have an extraordinary situation here in the UK. A rich pipeline of businesses, new and established, ripe for growth. A huge pool of capital, failing to invest in these very companies despite the prospect of far larger returns to savers. Surely these twin assets could be fused together, the field of dreams irrigated, to everyone’s benefit?
Latterly, we have begun waking up to this potential. With limited fiscal space, we desperately need policy measures able to stimulate growth at low or no fiscal cost. This has spawned several initiatives recently aimed at replumbing the UK’s growth eco-system.
First, successive Governments have created new institutions to support investment in UK assets, real and financial. These include the British Business Bank (BBB) and National Wealth Fund (NWF). Their investment capacity now stands in excess of £100 billion. This is significant, if modest relative to the UK’s potential.
Second, a sequence of reforms to pension funds – including the Mansion House Accord and the Pensions Schemes Act 2026 – have encouraged pooling of funds, a greater focus on returns as well as cost and increased allocation into private assets. These are well-intentioned, if also likely to be modest in their quantitative impact.
Third, there have been a sequence of reforms to capital markets led by the Capital Markets Industry Taskforce, including an easing of listing requirements, improving the company research crucial for investment and streamlining corporate governance and remuneration rules. These too are directionally helpful, if not game-changing.
Fourth, efforts are being made to encourage retail investment into companies. Working in partnership with the financial sector, the Government recently launched “Savvy the Squirrel” onto an unsuspecting public. Think Sid but smaller (and furrier). I fear Savvy will find rekindling retail investment in companies a tough nut to crack.
While well-intentioned, these measures are unlikely to be dial-moving for capital allocation and hence growth. They lack pace and scale. So what else might be done? The unfettered free(ish) market is not working for UK companies. And Government mandating allocation into UK assets is, rightly for most people, a step too far in the other direction. Is there a happy medium?
I think there is. This involves shifting the balance of investment incentives towards UK companies, while leaving those choices in the hands of asset managers and pension fund trustees. And, as luck would have it, our taxation system provides just the vehicle for achieving that incentives shift.
The Government extends over £50 billion in pension tax relief, and more than £10 billion in ISA tax relief, each year. As a country we spend more on savings tax relief than on defence. Yet these benefits are conferred without any accompanying commitment to support UK growth. Most are implicitly supporting US companies and governments.
This means these tax reliefs deliver a very low return on investment for the UK government. Shifting them towards investment in UK companies would leave investment choices in owners’ hands, while boosting significantly the returns on these investments in terms of UK business growth, jobs and productivity.
This is hardly a radical departure from the past. Prior to 1997, the UK’s dividend tax credit regime favoured pension fund investment in UK companies. The predecessor to ISAs, Personal Equity Plans (PEPs), had an explicit bias towards investment in domestic companies. Calls for a “British ISA” are in a similar spirit.
This is not about overly constraining investment choices. It is about correcting the (absence of) “home bias” that, at present, distinguishes the UK pension system from all others around the world. And, as best we can tell, no-one more would be more supportive of such a shift than those whose money it is – households.
When asked, more than 70% of British investors say they would prefer a pensions system favouring UK companies. Indeed, many mistakenly believe more than 40% of their pension is already invested in UK companies. Given these preferences, there would be a strong case for the default under pensions auto-enrolment being allocation into UK assets.
If the Government wishes to act, at speed and scale, to take advantage of the UK’s brilliant seed-corn businesses, before they perish on the vine or are plucked off by overseas foreign raiders, then greater boldness of this type is what will be required.
Conclusion
Let me conclude. Business is the engine of growth. If the UK cannot win its winners, business-wise, its growth malaise of the past two decades will continue. No-one wants that. So my message to the leaders in the room, and beyond, is a very simple one.
We have in the UK not one but two gift horses, both true thoroughbreds: British business and British capital. Do not continue to look them in the mouth. Do not bet the farm, sell the farm or tax the farm. Irrigate the field of dreams and growth will come.