New Financial said the biggest challenge for smaller listed companies has been the collapse in demand from the U.K.’s institutional and retail investors.

Speaking at the launch of a new report on the poor prospects for smaller companies in the UK from think tank New Financial, Stuttard said that instituting an inheritance tax on AIM shares would cause a “significant slug of capital” to exit the market.

The asset manager’s call comes as New Financial, a think-tank, released a report on the state of UK smaller stocks, noting that about 600 companies with a market value of less than £1bn have delisted over the past two decades.

The effect, though, has a disproportionate impact on smaller companies, argues New Financial’s managing director William Wright.

Canadian public sector pension schemes have 22% of their assets in private equity and 12% in infrastructure, compared with 6% and 5% for British local government pension schemes, according to a report last week from think tank New Financial.

UK pensions have a "significantly lower" allocation to domestic and unlisted equities than most developed market pension systems globally, according to a separate report published on Friday by think tank New Financial.

Just 4.4 per cent of UK pension assets are held in domestic equities, down from 6 per cent last year and much lower than a 10.1 per cent global average. Only Canada, the Netherlands and Norway have a lower allocation, according to a study by think-tank New Financial.

Minimum contributions in Australia and Sweden are around 12 and 18 per cent of salary, and New Financial — a capital markets think-tank — estimates that 20 per cent or more is typical for Canadian and Dutch workers.

"The most important change is that there has been a big shift in mindset by Labour towards the City in the past few years," William Wright, managing director of think-tank New Financial told Reuters.

"And I here look at figures from New Financial, a think tank. Their estimation is that another 4,400 companies in the EU could raise an extra €470 billion every year on capital markets – if we get there."

In seven of the past 10 years, more listed small companies have left the UK stock market than joined it, and this trend will continue unless serious action is taken, a new report from think tank New Financial said.

Illustrating the scale of the challenge for smaller companies, think tank New Financial said UK smaller company funds have recorded a 36th consecutive month of outflows while smaller company market debuts plunged by 80% to just 22 over the past decade.

Smaller companies represent only 8% of the combined value of Britain's bourse. But they account for over 80% of listed UK companies, provide key jobs and investment and can become tomorrow's stockmarket darlings with help from the government, regulators and industry, New Financial said.

In an analysis of banking and finance regulation since 2014, New Financial said a culture of risk-aversion in regulation and financial services since the 2007-2009 credit crisis had spilled into the wider economy and stifled investment.

New Financial showed that UK pension schemes have among the lowest proportion of funds held in domestic stocks and private assets of any significant global pension market, adding pressure on the government to revive investment in British industry.

UK pension funds allocate around 4 per cent of their assets to UK stocks, think-tank New Financial said in a report this week, down from over half 25 years ago — a stunning retreat.

Only 4.4% of assets in UK pension funds are invested in British equities, down from 6.1% last year and more than 50% 25 years ago, New Financial finds.

"Nobody in London is expecting any of what has moved from the UK to the EU to ever come back,” said William Wright, managing director of think tank New Financial

A recent report from think tank New Financial shows the number of smaller companies listed on London markets has dropped by around a third over the past 20 years – and accelerated significantly over the past decade.

Just four per cent of the stock market is now held by pension funds, down from 39 per cent twenty years ago, according to data from think tank New Financial.