This commentary is part of a joint series with the LSE Business Review.

In recent months in the UK, both the Conservative and Labour parties have announced big plans to mobilise private investment for policy priorities. There is huge potential to work with investors to direct more capital to net zero, housing, transport, education, health and other sectors, and many examples, from the UK and internationally, that are now ready to be replicated at scale. But lessons must also be learnt from the past to improve outcomes for everyone, writes Sarah Gordon.

Investment in the UK, both public and private, is chronically low compared to its peers, with the country ranking last among G7 countries on this measure. All UK political parties recognise that there is an urgent need to address this in order to boost economic growth, address regional disparities and fund a sustainable transition to net zero.

At Labour’s conference earlier this month, party leader Keir Starmer pledged a “genuine partnership” between public and private sectors, with the aim of crowding in billions of pounds of private investment towards growth and jobs. The Labour Party has proposed providing catalytic public investment through a Green Prosperity Plan, reforming the British Business Bank, so that more patient capital is available to new and growing businesses, and establishing a National Wealth Fund.

Meanwhile, Chancellor Jeremy Hunt’s Mansion House speech in July announced an agreement between nine of the UK’s largest Defined Contribution pension providers, representing over £400 billion of assets, to invest more in private markets. The Government argues this could unlock up to £50 billion of investment in high growth companies by 2030, if all UK DC pension schemes followed suit. The Chancellor has also asked the British Business Bank to explore the case for government to play a greater role in establishing investment vehicles.

Academics, think tanks and lobby groups have all added their voices, proposing a range of new growth-focused ‘super-funds’, many involving reform of the UK’s pension regime. The Economy 2030 Inquiry, a joint project between the London School of Economics and the Resolution Foundation, suggests extending the remit of the Pension Protection Fund so that it can consolidate pension schemes to create large funds to invest actively in UK equities, while the Institute for Public Policy Research (IPPR) proposes establishing a national investment fund to provide equity and convertible loan financing to companies for green manufacturing and industrial decarbonisation. The Capital Markets Industry Taskforce, the Tony Blair Institute for Global Change and the current Lord Mayor are all discussing ways our pension pots could fund the UK’s future growth.

All these proposals should be welcomed as signs of building momentum for large-scale and radical action to improve the UK’s disappointing investment performance. But the pensions industry is already pushing back against these proposals, with Elizabeth Fernando, chief investment officer of £33 billion workplace pension fund Nest, telling the Financial Times that, “[o]ur job is not to support levelling up. It is to build retirement funds.”

Ms Fernando’s words speak to widespread suspicion in the private investment industry around government initiatives that seek to direct the capital it manages towards policy ends. It is a suspicion that is shared by many in political circles, who balk at the idea of trying to collaborate with the City – particularly after what many perceive as the failed experiment of Public Finance Initiatives in housing, hospitals and other social infrastructure in the 1990s and 2000s. A report by the House of Commons Committee of Public Accounts in 2011 expressed the now widely held view that PFI deals “look[ed] better value for the private sector than for the taxpayer”.

Building on best practice

So what would it take to overcome these suspicions, and for government to work effectively and accountably with private investors to increase the flows of private capital towards economic, environmental and social goals? Research published by LSE’s Grantham Research Institute on 23 October provides practical guidance for both policymakers and investors, guidance that is grounded in real-life case studies and seeks to build on the lessons of the past.

The approach we advocate is not ‘PFI 2.0’, creating financing structures which shift public responsibilities off the public balance sheet, or which defer costs or liabilities for accounting purposes. There are plenty of policy priorities where private and public investors’ goals cannot and should not be reconciled.

But there are now numerous examples both in the UK and internationally of successful blended finance initiatives combining public and private investment in a range of sectors, from housing, renewable energy and health to funding start-ups and infrastructure projects. We showcase examples that demonstrate how government can use its financial and policy instruments to catalyse other, larger sources of investment. In one renewable energy fund highlighted in our research, public funding of £100 million catalysed £450 million from private investors. Well deployed, blended finance can crowd in multiples of private investment for every £1 of taxpayer money spent, in accountable and effective ways that respect the needs, whether achieving a policy goal or a financial return, of all partners.

Enablers for unlocking private finance at scale

These examples can be replicated now across the UK, but we also lay out six ‘enablers’ that could unlock private investment at scale, including new guidance on fiduciaries’ duty for the savings for which they are responsible, and how to share expertise on blended finance across government and local authorities.

We also propose the creation of a UK Growth Fund, designed in consultation with different investors to ensure buy-in and scale. The Fund builds on the range of existing proposals by political parties and others for a growth ‘super-fund’, but differs in key ways. Critically, its structure is designed to appeal to a broad range of investors with different mandates, investment approaches and risk tolerances. Mainstream institutional investors would be encouraged to invest in a fund-of-funds ‘umbrella’, while venture capital investors would invest in underlying sector-specific funds, designed to attract investment into key sectors for the UK’s future growth, such as renewable energy.

The fund-of-funds would provide sufficient scale and risk diversification for large institutional investors in venture capital such as pension funds. It would be managed by a government-backed national finance institution such as the UK Infrastructure Bank or the British Business Bank, and overseen by government, while the sector funds would be managed by private asset managers, selected through competitive tender.

The UK Growth Fund would work within government’s existing processes and institutions. It would not involve mandating investors, including pension funds, to shift their assets or strategies. Mandation would discourage private investors from cooperating in the establishment of any such fund, and would be in direct contradiction to ‘best practice’ in designing blended finance vehicles.

The approach we advocate is for collaboration between public and private investors, and for any blended finance fund to be co-created and designed from the outset in a consultative process, designed to take advantage of the different expertise of respective sectors. This is one of the most important lessons learnt from the successful blended finance initiatives in the UK and elsewhere showcased in our report.

The need for a very substantial boost to investment in the UK is not in doubt. It is immensely positive that so many different organisations across the political spectrum are convinced of the need for private investors to meet this need, and are suggesting mechanisms for them to do so. Some are more practical than others, some risk alienating partners in either the public or private sector. Our proposals seek to address these concerns to create an implementable and successful structure for channelling private savings into a prosperous, sustainable and inclusive future for the UK.

Read Sarah Gordon’s new report: ‘Investing in our future: Practical solutions for the UK government to mobilise private investment for economic, environmental and social policy priorities

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