Investing in the future: how to unleash greater productive finance

Written By:

Joe McDonnell
Chief Investment Officer
Border to Coast Pensions Partnership

With the increasing urgency for the UK to unlock billions in investment, Joe McDonnell from Border to Coast Pensions Partnership highlights barriers to productive asset investment and offers solutions to drive economic growth

The UK stands at a crossroads. Decades of underinvestment, sluggish productivity, and ageing infrastructure have left us trailing behind our global peers.

This clear need for investment has not gone unnoticed by institutional investors – or government – who are keen for investment. Indeed, we in the LGPS know that the scheme is already a significant force in the UK economy, with £120 billion invested in businesses and infrastructure. And the appetite to invest further is high. So, what exactly is preventing more investment into productive assets?

Border to Coast’s latest report, Unlocking UK Growth: Do Productive Assets Hold the Key?, identifies the barriers slowing down and preventing investment and looks for potential solutions to that elusive question of “growth”.

In the report, launched in March, we focus on infrastructure and private equity as the two areas of greatest opportunity and in clear need of greater investment. We draw on extensive interviews with Border to Coast’s internal investment team and the network of managers we work with in our £18 billion private market programme to better understand the scale of the opportunity.

Our report finds that capital does not flow where uncertainty reigns. Instead, it flows into international economies where certainty provides higher returns, leaving our domestic economy crying out for further support.

While pensions can’t drive UK growth, they play a strong role. If we want to unlock billions in investment, we need stable, long-term policies that provide confidence to investors. Reforming planning laws to reduce development risk, improving grid connectivity to support the energy transition, and strengthening the National Wealth Fund and British Business Bank to support investments that generate both economic and social returns are all essential steps.

Why is infrastructure investment essential?

Infrastructure investment is fundamental to economic growth, yet the UK lags behind other developed nations.

One global infrastructure manager that we interviewed said: “When we invest in regulated assets we don’t expect to make super-normal returns. What we want is transparency and stability, which are more important to us, as a long-term, low-risk investor, than very high returns. I think the UK suffers on both counts.”

Chronic underfunding, regulatory uncertainty, and an outdated planning system have stalled progress. We cannot afford to keep kicking the can down the road. Our report identifies clear steps to break this deadlock.

A bold infrastructure strategy backed by government must go beyond vague aspirations – it must provide a concrete roadmap with clear priorities and firm commitments to mobilise private investment. Smarter incentives for investors need to be put in place, ensuring transparent, predictable mechanisms that encourage greater investment in UK infrastructure and reward high-quality management.

“In terms of specific companies, projects and sectors, it does become a lot more about the minutiae around, for example, getting grid connections at the right time. Is there clarity around getting that planning permit? How long is that going to take? Are you getting responses quickly? If things don’t go to plan, are governments stepping in in the right way?”, another global infrastructure manager told us.

The urgent reform of planning and permitting is essential. The current system is a bottleneck, delaying critical projects and deterring investors.

The government has made encouraging progress in beginning to change this situation, but that change can’t come fast enough. Stronger collaboration between asset owners and managers will also be crucial. By working together, pension funds and asset managers can unlock large-scale investment opportunities that individual institutions might struggle to access alone.

Can private equity drive UK growth?

The UK has a strong entrepreneurial spirit, yet barriers prevent institutional capital from flowing into high-growth companies. Private equity could be a game-changer – if we remove these roadblocks.

A private equity manager told us: “It is very unusual to see a UK pension scheme with a private equity allocation that is anything other than low-to-mid single digits of a total portfolio.”

A shift in focus when it comes to assessing value is needed. There needs to be more focus given on net returns rather than just fees. Too often, investment decisions are skewed by a fixation on management fees rather than overall value. Government and regulators must provide clear guidance on assessing the true return on investment.

“Obviously, the end goal should be that UK domestic investors capture a much bigger proportion of the value from UK innovation than they are today,” another private equity manager commented.

A more coherent role for government agencies is necessary. Currently, investors and businesses face a confusing milieu of public bodies which all set up to support investment. The British Business Bank, British Patient Capital, and the Office for Investment must collaborate more closely. A joined-up system will make it easier for investors to navigate opportunities and deploy capital efficiently.

One contributor to the report shared: “We support the government’s drive – catalysed by the announcement of the new National Wealth Fund, to consider how the various bodies work together, and the desire to make this simpler and easier for investors to navigate. The UKIB and the British Business Bank naturally have different skill sets, and we will need to leverage the best of the full range of capabilities.”

Targeted tax and performance incentives will help build a world-class UK-focused asset management industry. Introducing incentives that attract both institutional and retail investors to back British businesses will be critical for long-term success.

It’s worth government considering initiatives like France’s Tibi scheme as a blueprint for channelling more capital into UK business – this provides incentives for institutions that back innovative French technology companies and has significantly boosted France’s asset management ecosystem. Or government could look at making UK investment a condition of tax breaks for ISAs and pensions. For DC schemes, the rollout of Long Term Asset Funds (LTAFs) is starting to address the need for liquidity, but early reviews are needed to ensure these structures deliver.

What must happen now?

The appetite to invest in the UK exists, which is great news. But without urgent action, too much capital will continue flowing elsewhere. The LGPS, with our long-term investment horizon and strong funding position, can play a significant role in the UK’s growth story.

However, pensions alone cannot transform the economy. We need a national effort – one that prioritises industrial strategy, fosters entrepreneurial leadership, and ensures businesses can access the funding they need to scale. Government, industry, and investors must come together to create the conditions for success.

The recommendations in our report are not just theoretical – they are practical steps that, if implemented, could help drive UK economic growth while securing the financial futures of millions of pension members. The moment to act is now. Let’s turn ambition into action and unlock the true potential of productive finance.

Cast Study

Border to Coast’s UK Opportunities programme
Forming part of the £16 billion (as at 31 March, 2024) Private Market programme, the Border to Coast UK Opportunities proposition is designed to direct long-term investment into productive finance assets. Launched with £500 million of commitments from partner funds in April 2024, the portfolio’s investments focus on “additionality”. It targets investment into sectors such as housing, transport, energy and growth finance expected to generate strong risk-adjusted returns while having a positive economic impact across the UK.