Blain’s Morning Porridge, July 27th, 2026 – Investing in UK Defence to Grow the Economy and protect the Nation.
“Are investment returns more important than security?”
The UK has 6 relatively new “mega” Local Government Pension Schemes. They are investing in the UK and globally. But are they focused on the right things? Less than 10% of their significant PE assets are managed by UK based firms. They are giving their money to US firms – further deepening the negative feedback loop diminishing UK capital markets.
The protection of the State is the primary duty of all governments. It is in the interest of all participants in the economy that conflict is minimised – and the only way to discourage aggression is to be prepared to fight. It is therefore an area to invest in.
There is a really interesting article in yesterday’s Sunday Times, an interview with the CEO of Border to Coast, the UK’s largest pension fund. Rachel Elwell has £120 bln to invest on behalf of its pension savers – local authority funds that represent the employees of 18 local government pension schemes (LGPS) from Cumbria across the North to the Tyne, and down the East Coast to Sussex. She wants to invest local.
Meanwhile, new Premier Andy Burnham has been getting a tough time, being asked difficult questions about what his No 10 North is going to achieve. The Torygraph basically says Burnham is guilty of treachery for even thinking about moving jobs to Madchester.
Aye… back when I were a lad….
There was a time when the UK was a homogenous industrial and manufacturing powerhouse. The Clyde and the Tyne built the best ships on the planet. The Welsh Valleys’ dug the premium coal. The steel towns of the Midlands made the best iron and steel. UK automotive and aircraft makers were some of the most innovative on the planet. But following the wars, the UK got old and tired. All things evolve and change. Margaret Thatcher saw the rot and decided to invest the windfall profits from North Sea oil to fund the run-down of the industrial economy, betting she could create something new, more vibrant and growth orientated.
Didn’t happen.
What emerged was a bifurcated financial economy – firmly based around London. The Yuppies of the 1980s got rich and bought themselves big houses in Chelsea. (Taxes and divorces mean they are downsizing!) Today’s successful young bankers might stretch to a 2-bed flat in Morden. The rest of the country? Forget it… Madchester, Glasgow and Liverpool all made the headlines, but never got to compete with the London-centric financialised economy.
Now Ms Elwell at Border to Coast says her fund, and the others like it will channel billions of funds in the local and global infrastructure projects, creating momentum, a “flywheel” effect that builds jobs, funds start-ups, and builds resilience. They are funding local housing, hotels, and a host of other things.
It all sounds exactly the kind of ask former Chancellor of the Exchequer Ravel Reeves had been asking for – the UK’s pension and investment funds actively promoting economic growth across the UK. Over the last decade around 100 UK local authority pension funds were urged to merge to create six mega quasi “sovereign wealth funds” to give them scale and clout in investment. It was a sound idea. The Sunday Times article compares them to the success of the “Maple 8” Canadian pension funds and Australian “Supers” who have become major forces in private capital investment into infrastructure and private capital.
The article points out UK pension funds held 50% of UK listed stocks a decade ago, but now that number is less than 4%. That’s staggering.
Over the last 20-years, the size of the UK listed sector has tumbled from 3,000 to 1,500 listed firms, and the share of UK stocks within the global equity market has fallen from 10% to 3%! Although the capitalisation of UK stocks is higher (up around 53%), it shows just how much smaller the UK financial markets have become – elsewhere stock markets have grown by far more. The UK’s global stock market dominance is now dimly remembered by a few old blokes like myself.
Why has it happened? And if UK pension funds aren’t buying into stocks, what are they buying?
One of the major themes of the Morning Porridge this year has been the success of US Capital Markets versus European Capital Markets. While European financial institutions remain disjointed, lack common purpose, but are highly regulated and increasingly bureaucratised by reporting requirements on issue such as net-zero, DEI, ESG and such, the US markets remain strictly entrepreneurial and driven by a focus on fees through wealth creation rather than rules.
Critically US investment banks and new trading institutions dominate market liquidity and investment products – and ask any UK fund what they are investing into today and it will be structured products, US corporate bond funds, Liability-driven investments, and such like – and they talk to the Americans. These products generate returns, but aren’t necessarily bringing jobs, productivity and investment to the UK.
And if the UK pension funds continue to pull their investments out of Gilts (which is happening because the new mega-6 isn’t so interested in safe returns as the smaller funds were), then the outlook for funding the UK and the broken-Britain economy gets even worse!
US private equity firms dominate the Private Capital Markets space. They have taken a host of UK firms private – Apollo is in the process of buying Sleazy Jet. The private capital markets narrative is about the success of financial management turning struggling firms into successes that can then be re-sold as IPOs in the future. The reality is many are loaded up with debt which can create enormous wealth for the general partners in carried interest.
The lack of a strong UK functional capital market has resulted in less interest in UK stocks, lower valuations, increased ownership of “cheap” UK assets by foreigners, the decline of the City of London, and made foreign capital markets look relatively more attractive. It’s a vicious negative feedback loop that has impacted across Europe – and the UK especially – if you are successful UK start-up looking for unicorn status, the easy answer is to go to the US markets and raise more capital at much higher valuations.
Border to Coast invests a third of its £120 bln in the UK, about 10% in UK listed shares (which is above average). CEO Elwell is looking at how to create hyper-local investment projects – for instance in local real estate. (Clue: use the markets to build affordable and social housing for young workers.)
But if the Big Six LGPS funds really want to change the UK economy, they need to direct their resources at growth and opportunities – funding start-ups and innovation. That should mean a focus on early-stage PE opportunities in the UK.
I looked into Border to Coast’s private equity investments on a commercial investment database. It has allocated significant funds to PE – which were about £4-8bln depending on how you read it and what has been committed. 90% of it is run by US headquartered Private Equity Funds including Stepstone, Digital Bridge, Warburg Pincus, KKR, Blackstone, Greenspring, Veritas and others. A B2C statement says it invests in PE firms with strong records in global M&A, growth and specialisation.
Across the £400 bln of assets are run by the UK’s LGPS, of which around £30 bln is invested in Private Equity. The UK government recently asked the Big Six Mega funds to disclose the share of PE assets invested in UK private businesses – it was between 10-20% depending which fund. 60% in the US and 30% in Europe.
Remember: the UK LGPS will be pay 2% management fees and 2% performance fees for US firms to invest UK worker’s pensions in non-UK investments.
Regular readers will know I am closely involved in the Defence Fund Spitfire Strategic Capital – a hybrid investor in start-up/early-stage venture and private equity across the rapidly developing Western defence sector. We’re currently in our first funding raise.
Border to Coast is responsible for the LGPS that cover much of the North and East of the UK; from Cumbria, Tyneside, Yorkshire, Teesside, down to the Wash – 14 million people. There are over 1500 SMEs in the area that are on Spitfire’s radar – small firms doing some fantastic work developing dual-use aerospace, engineering, manufacturing, robotics, sensors and materials. Together with over 400 SME firms already in the defence supply chain, they are creating and integrating the soft-ware, AI, cyber, electronics and autonomous capabilities the Ukraine War has conclusively demonstrated will be required if conflict in Europe widens.
The Border to Coast economy is a critical part of the UK economy and its defence ecosystem. That is the kind of business, creating real jobs, real manufacturing, growth and productivity that will boost the local economy.
In the Sunday Times interview it says Border to Coast is investing in private equity giant Blackstone. Really? Why. They should be investing in local funds that create multipliers.
I’ve reached out to a host of UK LGPFs in recent weeks. Some are still to reply, some are referring it to the right team, others have said it’s not an area they can invest in because of ESG (environment, social and governance) issues.
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital
Meanwhile, don’t forget about my new book:
You can read a review on the Society of Professional Economist’s website here.
The Battle For Hamble is a proper grown-up examination of how economies fail: a tale of Greedy Corporates, Bad Planning and Economic Illiteracy. It uses a wholly unnecessary Gravel Quarry in the middle of a prosperous village to illustrate the multiple failings and abdications of responsibility that have created Broken Britain. It’s about bureaucracy, money, exploitation and shareholders vs stakeholders. It’s about social injustice – asking why it’s ok to put 6000 jobs at risk so corporate bosses can reap bigger bonuses! Whether is the Hamble Quarry, HS2 or the abysmal state of UK armed forces due to bad procurement, read the book to understand how its broken process and bureaucratic indifference that is sinking Britain.
