Macroeconomic Pressure and the Evolving Role of VCTs in the UK Restructuring Landscape

We have recently been running a series of clinics for VCTs in and around the London area to bring into scope all the expertise and experience we have acquired over the years across Corporate Finance, Valuations, Special Situations and Restructuring within the VCT landscape.

This has created an interesting backdrop to hear the common themes in the market, and for us to provide insights into what we are seeing – including the challenge of exiting, how to drive up value and chances of sale, as well as how to best protect against downside risk exposure. I have collated this all into five keys points.

So, what do we know about the macro position? That the UK economy is facing persistent inflation, high interest rates, and fragile consumer and business confidence and this is where the restructuring sector finds itself entering a period of heightened relevance. 

For advisors, investors, and policymakers, the interplay between macroeconomic conditions, distressed small business dynamics, and the role of Venture Capital Trusts (VCTs) is becoming increasingly complex—and potentially catalytic.

1. Small business stress testing: A surge in restructuring activity

The UK’s macro backdrop has shifted decisively since 2022. With the Bank of England base rate holding above 4%, credit has tightened, and money remains expensive. At the same time, input costs remain elevated, and consumer demand is uneven across sectors. Throw into that ongoing uncertainty, volatility through tariffs, and several wars and it is a complex mess. 

Small and medium-sized enterprises (SMEs) will feel the variables more so than most. These businesses form the lifeblood of VCT portfolios and dominate restructuring cases by volume, and they are bearing the brunt:

• Insolvency Service data shows corporate insolvencies up significantly year-on-year, particularly in hospitality, construction, and retail (note that this has been the case since 2020 and Covid, with prior years more stable by comparison).
• Many businesses that survived the pandemic via CBILS/BBLS loans are now struggling with repayments, especially in the absence of top-line growth.
• Labour shortages, wage inflation, and supply chain volatility continue to squeeze margins.

Whilst this has created a pipeline of restructuring work that the market has yet to fully see but will likely crystallise, it is also a dilemma for VCT managers and early-stage investors: how to preserve value in distressed or underperforming portfolio companies in an environment of weak exit markets and rising costs of capital.

2. VCTs at a crossroads: Rescue capital or retreat?

VCTs traditionally focus on early-stage growth capital, but the current climate is forcing a strategic pivot in many funds. Managers are faced with difficult choices:

• Double down or write down: Is it worth allocating follow-on capital to turn around distressed portfolio companies? Or is it more prudent to cut losses? This is the dilemma we are seeing more and more in our role as advisers. 
• Rescue funding vs. new opportunities: With fewer exits and slower fundraising, VCTs must deploy capital more strategically. In many cases, rescue rounds or bridge financing for struggling but viable companies are taking precedence over new investments.
• Governance and control: In distressed situations, VCTs are increasingly invoking enhanced control rights—board changes, operational reviews, and contingent capital structures to protect downside risk.

In effect, VCTs are being drawn—willingly or not—into the restructuring ecosystem, acting more like special situations or turnaround investors than conventional growth backers.

3. Advisory opportunities: A restructuring revival

For restructuring professionals—whether in legal, financial, or operational turnaround—the macro environment has ushered in a wave of opportunities:

• Debt restructuring and refinancing: High-interest legacy debt is unsustainable for many SMEs, and demand for creative recapitalisations is rising. There has been a rise of ‘amend and extend’ terms largely as a result of ongoing uncertainty. 
• Pre-pack administrations and CVAs are seeing renewed interest as companies seek to preserve brand value and restructure balance sheets. Whilst pre-packs have always been a useful tool to restructure offering both transparency and a going concern solution – CVA’s were largely side lined by the rise of the restructuring plan. But creditors are now recognising that CVAs can be more inclusive and offer a fairer outcome without cross-class cram down. 
• Equity restructuring: Where VCTs are involved, there’s increasing engagement in negotiations around down rounds, shareholder dilution, and reset incentives for founders and management. There is also a lot of discussion around what constitutes good and bad leavers and the knock-on effect to incentives. 

Importantly, advisors who understand the venture/growth capital model are especially valuable. Restructuring early-stage or scale-up businesses requires a different toolkit—one that blends insolvency expertise with venture economics, governance reform, and founder psychology.

4. Market consolidation and a ‘survival of the fittest’ dynamic

With liquidity constrained and the cost of capital up, only the most capital-efficient, well-governed businesses are likely to thrive in the near term. For VCT managers and restructuring professionals alike, this creates:

• An opportunity for market rationalisation: Many marginal or overfunded businesses will fold or be absorbed, clearing space for better-quality operators.
• Deal-making potential: Distressed M&A, asset sales, and turnaround equity injections are becoming more common, and VCTs with dry powder or flexible mandates may benefit from opportunistic investments in undervalued assets.
• Convergence of private equity and restructuring: Especially in the lower mid-market, PE and VCT investors are increasingly engaging restructuring advisors early — seeing distress as a phase of the investment cycle rather than a failure.

5. Looking forward: Regulation, policy and opportunity

The evolving tax environment (including the future of Business Asset Disposal Relief, CGT, and VCT tax reliefs) will influence the direction of both the restructuring and VCT landscapes.

That said, VCTs remain structurally aligned with long-term government goals:

• Supporting UK innovation and productivity
• Backing job-creating SMEs
• Stimulating regional development

This gives the sector a tailwind—provided managers can adapt mandates to reflect a more distressed-heavy pipeline and advisors can provide tools beyond standard insolvency processes.

In Conclusion: The Restructuring-VCT nexus Is no longer niche

The dividing lines between growth capital and distressed capital, between early-stage investors and turnaround specialists, are blurring. VCTs, long positioned as engines of entrepreneurial growth, are now also stakeholders in the UK’s small business recovery and restructuring ecosystem, whether they like it or not. 

For the restructuring community, this presents a rare opportunity: to bridge the gap between early-stage risk capital and value-preserving interventions—helping businesses pivot, survive, and ultimately, thrive. It is something we are seeing more and more of at FRP.