According to the British Venture Capital Association’s latest annual investment report, more private money is being ploughed into business in this country than ever before.

In 2004 the amount invested by UK private equity firms more than doubled to £9.7bn, and over 1,556 companies were financed. It is estimated that around three million people in the UK are now employed by private equity-backed firms, and UK private equity accounts for around half of the entire European market. But the manufacturing sector has, to an extent, missed out on this boom in private equity investment.

Jon Moulton, head of Alchemy Partners, the private equity firm which offered to invest in MG Rover four years ago and was – many now believe mistakenly – turned down by the government, believes the sector is simply less attractive to investors.

"The reaction of private equity investors to the manufacturing sector is mostly ‘why start here?’” he says. “Alchemy really does not fund manufacturing start-ups: only mature businesses with more predictability. The manufacturing businesses we have invested in are mostly turnarounds.

"The reasons are simple – manufacturing offers a poor competitive environment and a poor employment environment. For more venture capital firms to consider manufacturing investment, the government should decrease employment costs and regulation, and workforces need to become more flexible."

The government has also identified this ‘equity gap’ among businesses seeking to raise relatively modest sums of risk capital. It has set up Regional Venture Capital Funds, public/private funds which have put almost £3m into small and medium enterprises in the manufacturing sector. Other measures such as the Small Firms Loan Guarantee Scheme have also helped, but in a December 2003 report into the problem the government still found an acute shortage of risk capital for investment between £250,000 and £1m.

In response, the government has come up with Enterprise Capital Funds – privately managed commercial funds investing a combination of private and public money in small, growth-orientated businesses. Under these the Treasury estimates that £2m of investment will become available to small businesses in all sectors.

The BVCA disputes that manufacturing is necessarily a ‘poor relation’ when it comes to private equity, but agrees that the government could do more to encourage investment in every sector.

The association wants the government to focus less on providing public money for investment, and more on freeing up the private sector to plough that money in by itself. Manufacturing would then benefit along with everyone else.

"The UK private equity industry is one of only a very few fully regulated private equity industries in the world," BVCA chairman Anne Glover says.

"Private equity industries in the rest of Europe, the United States and around the world operate in environments that suffer nothing like the level of regulation that we battle with here in the UK. There is a real danger that this successful and vibrant UK industry will be hobbled by a flood of rules and regulations. Action must be taken, not just to stem the flow but actually to reverse the tide."

A Treasury spokesman responded to the BVCA’s call for deregulation by pointing out that the government had already made concessions.

"The UK has a world-leading financial regulation framework, under which the City has thrived and continues to be one of the world’s top financial services centres," the spokesman said.

"For example, the recent two-year review made important improvements, and in early March two changes were made which specifically help the private equity industry.

"First, we allowed investors to self-certify themselves as ‘high net worth individuals’ or ‘sophisticated investors’, without having to go through an authorised intermediary. And second, we allowed firms to promote to individuals that they ‘reasonably believe’ are self-certified as ‘high net worth’ or ‘sophisticated’.

"These exemptions will strike the right balance between consumer protection for those investors who are likely to be well-informed and experienced, and access to finance for smaller high-growth businesses, seeking relatively modest injections of capital."