Legal briefing | 03 Oct 2025 |

Travers Smith's Alternative Insights: Private markets and policy goals

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KEY INSIGHTS

Private markets are essential: European governments must partner with private capital to achieve ambitious investment goals for defence, climate, and infrastructure, leveraging extensive private market dry powder.

Reform urgency required: Broad consensus exists on the need for regulatory reform to unlock investment and drive growth, but tangible action, not just talk, is needed to remove barriers and accelerate progress.

Incentives unlock finance: Public-private collaboration and incentives such as blended finance, public co-investment, and risk guarantees are critical to channelling capital into priority sectors, both in Europe and emerging markets.

A regular briefing for the alternative asset management industry.

European governments have no shortage of policy challenges. Cracking most of them will require significant investment. Whether it's for defence, climate solutions or housebuilding – or any of the dozens of other calls on scarce public money – policymakers will need to mobilise the private sector. And, given the dry powder in the private markets, there are significant opportunities for mutual benefit.

Some of this investment will happen anyway. Speaking at an industry conference last week, one private markets investor argued that European investments are relatively attractive. A significant portion of the funding required to boost Europe's economy will come from global private capital firms, he said – especially as real economy and structural reforms appear to be a priority for governments.

But a steadfast focus on those reforms is critical. It is clear to most European politicians that over-regulation has been holding back innovation, and there does seem to be consensus that change is necessary. Reaching agreement on what to change and how quickly is more difficult and progress is too slow. Mario Draghi, author of an influential 2024 report, gave an unflattering update on progress earlier this month. The UK has not done much better, despite post-Brexit pledges by senior figures. The direction of travel is right, but more urgency is needed. Professor Draghi called for "concrete dates and deliverables".

In the UK and across the EU, private capital firms can work with governments to push these reforms. Private capital has emerged from the shadows and is now seen as a critical partner for growth. The UK's finance minister said as much at a gathering of private equity and private credit firms a few weeks ago, pointing out that some of the UK's fastest growing companies are backed by venture capital and private equity. She renewed her pledge to cut red tape.

Industry associations like the BVCA and Invest Europe have worked hard to build trust with regulators and politicians. Firms can support their industry bodies in helping governments to identify and dismantle barriers to investment and create more investible projects. Instead of being passive observers, the industry can now help to shape its own destiny.

Regulatory reform is vital, but some capital will also need a helping hand from the public purse – especially if the investment is going to land where policymakers want it to. In the UK, the additional capital for the British Business Bank announced earlier this year, establishment of GB Energy and the National Wealth Fund, and the important and ambitious launch of the British Growth Partnership (BGP), will help in funding infrastructure and innovation. Co-investing in funding rounds alongside traditional venture capital funds – the initial modus operandi of the BGP – is one way to scale up finance for promising British companies.

Another is to invest in the funds themselves – the European Investment Fund (EIF) and national equivalents have been doing that for decades. A more recent initiative – NOVA, spearheaded by the BVCA and modelled on the French Tibi scheme – calls for public sector support for a platform that should mobilise more pension fund capital for productive finance.

These and many other similar schemes across Europe have the benefit of simplicity, mobilising finance but not directly subsidising companies. But more structured solutions – and those that go beyond early-stage venture finance – are also needed. In many cases, markets will not respond to calls for finance unless the incentives are changed.

"Regulatory reform is vital, but some capital will also need a helping hand from the public purse – especially if the investment is going to land where policymakers want it to."

An initiative launched at the London School of Economics this week is timely. LSE's new "Blended Finance Lab" brings together academics, investors and policymakers. The challenge: to scale up blended finance by a factor of 10.

Blended finance – combining public or philanthropic capital with private sector investment – is not new. It is most obviously needed to fund critical sustainable development, including adaptation to the impacts of climate change, in emerging markets and developing economies, and it needs to scale.

Among the barriers already identified for these markets are insufficient data on performance, absence of ratings, lack of standardisation, and banking regulation – as well as too few investible projects. The LSE initiative aims to identify concrete actions that can be taken to facilitate the growth of blended finance, learning from past successes and failures. In time, asset managers with allocations to the Global South stand to benefit if they can navigate the hurdles.

But the initiative will also have lessons for those designing interventions in Western Europe. Sometimes, a first-loss guarantee or geared upside for the private sector investor – or, perhaps, a guaranteed return on the project in the form of a floor price, price subsidy or demand side protections – will be the best way to unlock capital. Various combinations of these tools were employed effectively in the market for renewable energy, an industry that can now largely stand on its own.

Persuading governments to change the incentives in markets is not easy, especially when the orthodoxy has for so long been to let the market decide. Public sector caution is entirely appropriate. But as Mark Carney, then Governor of the Bank of England and now Prime Minister of Canada, said in 2015: "markets are not ends in themselves, but powerful means for prosperity and security for all". When they don’t deliver desired policy outcomes on their own, governments must give them a helping hand. There may never have been a better time for alternative asset managers to work with governments to help them design effective interventions.