By Ken Wotton, portfolio manager of Strategic Equity Capital (SEC) and Baronsmead VCTs at Gresham House
Britain’s small-cap listed markets are arguably the most efficient, accessible growth capital infrastructure the UK has, and policymakers are sleepwalking past them.
The Mansion House Accord speaks of unlocking £50bn for British growth, while the Pension Schemes Bill promises to redirect long-term capital into productive assets. The language and direction of travel is right, but the UK government has to pay attention to the small-cap listed market before it is too late.
In a rush to keep up with the headlines and court the private markets, policymakers have taken their eyes off a part of the listed market in need of a real lift. The consequences won’t be felt in some distant tale in economic textbooks, but rather in the next wave of British businesses that fail to find capital, stay private too long or sell themselves to overseas buyers at historic-discount valuations.
The data is undeniable – AIM is contracting at an accelerating pace. In 2024 alone, 89 companies left the junior market and only 18 joined. The market now comprises 695 companies, representing its smallest headcount in 23 years.
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Global funds network Calastone has reported 10 consecutive years of outflows from UK-focused equity funds, amounting to a cumulative £54.6bn of capital withdrawn over that period.
Liquidity in the small-cap part of the market has reduced markedly in recent years, with average daily trading value combined across the FTSE SmallCap Index and AIM declining by over 50% in 2025 compared to the buoyant market conditions of 2021.
The structural withdrawal is most acutely visible in pension allocations. UK pension funds now allocate just 2.8% of their equity investments to domestic equities.
This is not a story about underperformance. UK small caps are trading at valuations below their international peers as well as private market comparables. UK equities trade at a circa 20% discount to the price to earnings ratio of global equity comparatives. Within the UK, small caps and micro caps trade at a 20% and 30% discount to their larger peers. This substantial double discount means the opportunity is now and a direct function of the structural withdrawal.
New Prime Minister Andy Burnham has placed significant emphasis on tackling regional growth disparities. Enabling growth means more than opening private markets to pension capital – it also means ensuring the listed public markets, which offer liquidity, transparency and instant democratic access, are flourishing.
AIM and the UK’s small-cap listed market are not a legacy artefact. They are the segment of the capital markets where growth businesses – which are creating jobs, generating export revenue, driving innovation and paying corporation tax – access scale capital.
They can also play a crucial role in delivering devolution-led growth, with many businesses outside London acting as important regional anchor institutions and helping to address regional disparities. A vibrant small-cap market is therefore a key part of the UK’s economic infrastructure.
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UK-listed markets need proactive policy support. The simplest step would be for the UK government to explicitly acknowledge public markets as a core part of Britain’s growth and scale-up ecosystem, alongside private markets and venture capital.
Unbeknown to many investors, AIM stocks are already included in the Mansion House Accord, yet lack of public acknowledgement means this opportunity remains largely under-appreciated. Making this clearer would ensure government’s efforts to mobilise growth capital extends to public markets.
Pension fund and ISA allocations, which benefit from tax incentives, should be directed towards domestic-listed equities, particularly small and micro caps. This would be a low-friction, high-impact reform that investors would welcome and could drive capital back into a core part of the UK’s economy.
The companies are there. The value is there. What’s missing is the policy agenda and will to back UK growth where it is actually listed.
