The United Kingdom’s investment environment faces significant headwinds from recent tax policy changes and tightening credit conditions. Data from the Bank of England showed that traditional bank lending remained largely stagnant through Q3 2024, while the Institute of Directors reported that two-thirds of business leaders view recent budget measures negatively. Against this backdrop, alternative financing options have gained increased attention from investors and business owners seeking capital for new ventures and to support growth.
One key challenge stems from the U.K.’s increase in capital gains tax, which affects how investors can efficiently access capital from their existing equity holdings. The situation could become more complex for private market investments, as capital gains tax on carried interest is expected to rise from 28% to 32% in April 2025, with additional increases likely in 2026.
“Realising profits on equity portfolios in order to fund new investments has become a much more costly option, and slowing investment in U.K. companies could be one of the budget’s unintended consequences,” noted James Mungovan, chief executive officer Europe, at alternative financing provider EquitiesFirst, in a recent op-ed .
A Role for Alternative Financing
Despite these challenges, the U.K. continues to attract significant investment interest. The government’s International Investment Summit in October 2024 secured billions in new commitments across sectors ranging from data centers to life sciences. Additionally, recent economic indicators suggest improving conditions, with moderating inflation and two Bank of England rate cuts in 2024 leading to upgraded International Monetary Fund growth forecasts for 2024-2025.
The IMF projects Britain as the joint third-fastest growing economy in the G7 alongside France. While current GDP per capita growth remains more modest at rates of 0.6% in 2024 and projected for 1.1% in 2025, the broader trajectory supports increasing investor confidence.
Yet access to traditional financing remains constrained. The Bank of England has warned about the risks of an intensified credit crunch due to vulnerable financial markets. This limitation on capital access could potentially stall the country’s economic recovery if businesses cannot secure funding for growth initiatives.
Nonbank lenders have increasingly filled this funding gap. Bank of England data revealed that these alternative financiers provided nearly all of the approximately £425 billion (roughly $524 billion) net increase in lending to British businesses between 2008 and 2023. At the same time, the global private credit market has now reached nearly $2.5 trillion, with specialty finance emerging as a particularly active segment.
Equities-based financing such as that offered by EquitiesFirst is one type of this specialty finance, and it’s an alternative that may interest major shareholders in listed companies. This approach allows investors to access liquidity financed against equity holdings while maintaining long-term exposure to their positions.
EquitiesFirst, which has provided over $4.5 billion in financing globally since its founding in 2002, takes an equities-based approach meant to align interests between the finance provider and the investor while maintaining the investor’s long-term equity exposure.
Market Outlook and Considerations
Several factors support the case for maintaining rather than liquidating U.K. equity positions. The London Stock Exchange’s £4.4 trillion market capitalization provides significant market depth, while proposed pension fund reforms could drive new demand for U.K. assets. Major companies continue announcing U.K. investment plans, and recent outflows from U.K. equity funds, approximately £1 billion pre-budget, are only a small fraction of total market value.
The Bank of England’s most recent lending survey suggests that traditional credit supply remains constrained while demand may increase as interest rates decline. This dynamic could further widen the gap between funding needs and traditional lending availability, potentially increasing interest in alternative financing solutions.
As U.K. businesses and investors deal with an environment of higher capital gains taxes and constrained traditional lending, equities-based financing could provide an alternative path to accessing growth capital. While this approach carries its own considerations and risks, it offers a mechanism for major shareholders to maintain their equity positions while accessing liquidity for new investments.
The success of this financing model will likely depend on continued market stability, regulatory clarity, and the ability of providers to maintain robust risk management practices.
“You may believe that U.K. equities will gain value over the next few years as growth improves and the chancellor’s proposed pension fund reforms bring a new driver of demand for U.K. assets,” Mungovan wrote. “Or, like companies from DP World to Iberdrola, you may see opportunities ahead for investment in Britain.
“And you may also have a view that CGT may come down again one day, when the political cycle turns once more,” he continued. “Holding any of these convictions would support the case for holding on to core, long-term investments and looking beyond equity sales and bank lending when it comes to funding new investment opportunities in the U.K.”
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