Why LPs Should Invest in Rated SMEs — and What’s Holding Them Back

Institutional investors — or Limited Partners (LPs) — manage trillions in capital on behalf of pensions, endowments, and sovereign wealth funds. But while they routinely invest in blue-chip stocks, real estate, and venture capital funds, direct investment in startups and small businesses (SMEs) remains rare.

What if that changed?

Imagine a world where SMEs are rated/scored for investability, just as bonds are rated for creditworthiness and SMEs have credit scores from the likes of Experian and Equifax. Related to this, the UK government wants pension funds and retail savers to invest in SMEs. Could ratings unlock a wave of institutional investment into the real economy?

This blog explores why LPs should invest in rated SMEs — and what it would take to get there.

✅ The Case for Investing in Rated SMEs

1. Standardisation De-risks the Unknown

SMEs are diverse, opaque, and hard to compare. That’s why LPs prefer to work through intermediaries like VC funds.

But investability ratings — standardised, independent, data-driven assessments of a SME’s potential to deliver a return on investment — change the game. They offer:

• A consistent signal of quality and risk

• A tool for benchmarking SMEs across sectors

• A method for filtering investable opportunities in a scalable way

Just as credit ratings made bond investing feasible at scale, investability ratings could do the same for SMEs.

2. Attractive Risk-Adjusted Returns

SMEs worldwide, struggle to obtain investment. Circa 90% applications are rejected many because they are not investment-ready.

With rising costs and low yields in traditional asset classes, LPs need new options. If SMEs were rated for investment, LPs could better identify those with strong growth potential,  opening the door to new portfolio strategies, such as SME growth equity funds.

3. Alignment with Impact and ESG Mandates

Many LPs now have impact-driven mandates. An investability rating layered with ESG metrics would help LPs screen for SMEs aligned with both financial and social impact goals.

⚠️ The Challenges and Risks

While the opportunity is clear, several challenges must be addressed:

1. Trust in the Rating System

A credible rating requires:

• Transparent, trusted methodology

• Data-driven assessments

• Independence from conflicts of interest

LPs will not rely on a rating unless it’s backed by rigorous evidence and industry buy-in.

2. Liquidity and Scalability

SMEs are illiquid and fragmented. LPs often prefer ticket sizes above $10 million — which individual SMEs can’t absorb. Solutions may include rated SME funds or portfolios and Co-investment syndicates

3. Ecosystem Adoption

For investability ratings to become the norm, standards would need to be created that are agreed, recognised and coordinated across multiple actors — including LPs, VC firms, Angel investors, accelerators and other support organisations. And, would need to be used in due diligence, marketing and integrated into capital allocation policies

🕒 How Long Until Investability Ratings Become the Norm? A realistic adoption curve might look like this:

Year	Milestone
0–2	Pilot phase: early-stage rating frameworks launched, used by accelerators and government-backed funds
3–5	Early adoption: recognised by VC firms and syndicates, angel networks, and development finance institutions
5–10	Mainstreaming: integrated into LP due diligence and used in fund strategies

Estimated time to mainstream adoption? 7–10 years, depending on validation, ecosystem uptake, and regulatory support.

🧭 Final Thoughts

The SME funding gap remains one of the biggest missed opportunities in building global, economic growth. LPs have the capital to close that gap — but not yet the tools to do so, confidently.

Investability ratings could be that tool. If built transparently, were trusted, adopted widely, and linked to investable structures, they could give LPs a safer, scalable way to back the next generation of  SMEs and boost real-economic growth sought by Governments, worldwide.