H2 2025 Market Recap: Venture Capital in Transition

Institutional Market Update: Christina Theilgaard, Head of IR

A challenging VC fundraising environment

VC fundraising in 2025 was extremely challenging. Persistent liquidity constraints meant that many investors delayed new commitments while waiting for distributions from existing funds. As a result, capital formation slowed materially: funds raised by European VC managers fell by around 60% year-on-year, according to PitchBook.

This scarcity of capital intensified competition for LP commitments. To differentiate themselves, GPs increasingly had to offer more than the promise of financial returns alone. Economic incentives, such as early-bird discounts linked to commitment size or timing, have long been standard in private equity but are now becoming more common in venture. Co-investment rights were also used more actively to enhance LP returns. On the non-economic side, managers sought to deepen relationships through advisory committee roles, enhanced transparency and reporting, and stronger ESG positioning.

However, for emerging managers, offering such inducements comes with operational and legal complexity. Managing fairness across investors and limiting most-favoured nation exposure has become increasingly important and challenging in a highly competitive fundraising market.

The increasing role of public capital

Public capital continued to play a disproportionately large role in European VC fundraising. The continent’s most active LPs remained state-backed institutions, including pan-European vehicles and national development funds. In the UK, this trend intensified. The government significantly expanded the British Business Bank’s total financial capacity to £25.6bn, enabling a substantial increase in annual investment activity—up to approximately £2.5bn per year. This expansion was explicitly designed to channel more capital into smaller businesses, including venture and growth equity, in support of the UK’s broader industrial strategy.

Later in the year, the British Business Bank launched the British Growth Partnership, a new initiative aimed at mobilising hundreds of millions of pounds from institutional investors, particularly UK pension funds, into VC. Early participants included several large insurers and asset managers.

These developments complemented the Mansion House Accord announced in 2023, which sought to encourage pension fund allocations to private markets. In practical terms, the Accord addressed pension demand, while the British Business Bank’s expanded mandate focused on creating scaled, credible vehicles and acting as a cornerstone investor to de-risk early fund closes. While progress has been meaningful, the pace remains slow, and the industry is still some distance from seeing large, systematic pension fund allocations into VC across the UK.

The changing faces of VC backers

Historically a core source of VC capital, family offices continued to support the asset class but at reduced levels. Many rebalanced portfolios toward private credit, real estate, and other alternatives offering stronger short-term risk-adjusted returns. In some cases, this shift simply reflected limited liquidity, as capital committed to VC in prior years has yet to be returned.

For emerging VC managers, fund-of-funds remained critical anchors, particularly those with deep sector expertise and long-standing relationships. These investors continued to play a key role in enabling first and second closes.

Corporate investors were more selective overall, but appetite remained strong for funds providing strategic exposure to innovation in areas such as AI, biotech, pharmaceuticals, and deep tech. Access to frontier technologies continued to justify VC fund commitments even amid broader caution.

Another notable development was the gradual emergence of high-net-worth individuals accessing VC funds via wealth platforms. Historically constrained to VCTs and EIS vehicles, private investors are beginning to gain access through newer pension and private market structures. Adoption remains slow due to operational constraints at platform level, and these routes typically lack the tax advantages associated with traditional VCT vehicles.

Fundraising outlook for 2026

As 2026 begins, macroeconomic uncertainty and liquidity constraints show few signs of immediate relief. Nevertheless, sentiment across the VC ecosystem is cautiously optimistic. Institutional investors increasingly recognise that venture capital can play a valuable role in long-term, diversified portfolios, particularly given its active ownership model and potential insulation from short-term market volatility. Improving conditions in Europe’s IPO markets and the prospect of lower interest rates are expected to gradually restore liquidity to the system.

In the near term, secondary transactions are likely to become even more important, providing earlier liquidity options for LPs and helping fund managers unlock value from mature portfolios. While fundraising conditions will remain selective, incremental improvements in exits and distributions should support a more constructive environment over the course of 2026.

Retail Market Update: Stuart Mant, Head of Business Development

How the 2025 Budget reshapes the future of VCT investment

In the November 2025 Budget, the Chancellor announced a series of unexpected reforms to the Venture Capital Trust (VCT) scheme, which presents the industry with a trade-off. From April 2026, the rate of upfront income tax relief on new VCT investments will be reduced from 30% to 20%. At the same time, however, the government is modernising the scheme by significantly increasing investment limits, doubling the lifetime funding cap per company to £24m, and to £40m for knowledge-intensive companies.

The decision to double investment limits reflects a long-standing industry objective, as advocated through the Growth Beyond Limits campaign. It recognises that UK companies require sustained access to capital over longer time horizons to compete effectively on a global scale. By aligning the VCT framework more closely with the realities of scaling businesses in 2025, this reform enables managers to support their most successful portfolio companies for longer, to potentially enhance growth across VCT portfolios.
Conversely, we recognise that the reduction in upfront tax relief will be disappointing for investors. We are actively engaging with the Treasury to better understand the analysis underpinning this decision, with the aim of ensuring the scheme continues to function effectively as a mechanism for attracting long-term growth capital.

The shift in investor and adviser sentiment

Ahead of the reduction in tax relief taking effect, we have seen a notable increase in inflows as investors seek to benefit from the higher 30% rate while it remains available. Looking ahead into 2026, however, both investors and financial advisers have indicated a moderation in enthusiasm for VCTs following the Budget announcement. A recent poll conducted by the Association of Investment Companies (AIC) found that some 75% of advisers expect to reduce their use of VCTs once the new rules come into force. As a result, we would expect overall industry fundraising levels to decline next year.

Overall, this reflects a mixed but generally cautionary shift in sentiment. While short-term tactical demand has risen, forward-looking investor and adviser appetite has softened, suggesting a more selective, risk-aware approach in the future, even as VCTs remain relevant for certain investor segments.

A snapshot of Albion’s investments in 2025

Investment activity in 2025 was robust, with over £55m deployed across a combination of 14 new investments and a series of follow-on rounds, supporting the next phase of growth for existing portfolio companies.

Albion continues to adopt a thematic investment approach, focusing on sectors where we see the strongest long-term growth potential. We target businesses addressing structural challenges in areas such as digital health, cybersecurity, software and fintech, where growth is driven primarily by innovation and regulatory change rather than broader macroeconomic conditions.

Evaro, a new addition to the Albion VCTs, is a great example. Evaro is UK-based digital health and online pharmacy platform that is helping to make healthcare accessible for all. As patients become more actively involved in their health, the way care is accessed and delivered is changing and Evaro is well positioned to capitalise off this trend.

Latent Technology is another example. It is a pioneering game technology company focused on AI-driven physical animation, helping to cut build times and elevate in-game interactivity. The same simulation technology has clear applications in other industries like robotics, offering a credible path to long-term expansion beyond gaming.

Navigating concentrated markets and the strategic role of VCTs

Beyond the potential impact of recent tax changes highlighted, the strategic case for VCTs is being reinforced by evolving market dynamics. Public equity markets have become increasingly concentrated and volatile, with investor flows rotating away from large-cap technology toward broader value exposures. At the same time, although UK inflation is moderating, it continues to present a material challenge to preserving real returns on cash for clients.

Against this backdrop, VCTs can serve as a genuinely differentiated portfolio allocation. By providing measured exposure to unquoted, early-stage UK companies, VCTs offer access to a growth asset class with lower correlation to daily public-market sentiment and index-driven volatility. For suitable clients, this diversification can help advisers enhance long-term return potential while reducing reliance on increasingly crowded listed equity markets.

Moreover, the tax-free dividends generated by VCTs are now one of their most compelling features for advisers. With dividend allowances for general shareholders all but eliminated, the ability to provide a targeted c.5% tax-free yield is a powerful differentiator for income-seeking clients and a highly effective solution for post-tax income planning.