UK pension funds, controlling assets worth more than £800bn, are preparing to put unprecedented amounts of money with UK private equity specialists investing in unlisted companies.

The move comes three years after Tony Blair, the prime minister, pleaded with UK pension funds to invest more in the grass roots of British industry, complaining that they invested five times less in domestic entrepreneurs than their US counterparts.

New figures, to be published today by the BVCA, the UK industry's trade body, show that UK pension funds channelled a record amount of money into private equity funds last year, doubling their investment from £817m to £1.6bn.

This took place even though private equity funds slumped to their worst one-year investment performance for 10 years, with venture capital specialists suffering most with a return of -35.7 per cent.

UK pension fund trustees paid more attention to private equity funds' long-term performance record, which outperformed most of the principal stock market indices over three, five and ten years, including the FTSE All-Share and the FTSE 100.

It is the clearest sign that pension funds are ready to take greater risks to honour their pension promises.

Edmund Truell, the BVCA's chairman, said: "This demonstrates that private equity is now an accepted asset class." Long-standing investors in private equity - among them the Coal Pension Fund, the UK's largest public fund with £24bn of assets - boosted their contribution to unlisted companies, according to the BCVA.

Now, several new investors, including local authorities, are putting money into private equity funds. South Yorkshire Pension Authority, with £2.35bn of assets, is to allocate 3 per cent of its fund by 2004, up from 1 per cent. West Sussex County Council, with £850m of assets, has just invested £40m. Kent County Council, with £1.5bn of assets, is planning to invest in private equity for the first time.

The new investment comes at a time when pension funds have faced a financial "double-whammy": their investment returns and their asset pool have slumped during the bear market; while life expectancy of their beneficiaries, and so the amount of money needed to support them, has extended.

In 1999, Mr Blair triggered a government campaign to persuade big investors to support Britain's start-up companies. But UK pension funds' investment in private equity fell from £553m in 1998 to £437m in 1999.

In 2000, chancellor Gordon Brown commissioned Paul Myners, then chairman of Gartmore Investment Management, to find out why UK pension funds were not investing in home-grown entrepreneurs as much as their US counterparts. That year, funds increased the level of investment to £817m.

Last year, following publication of the influential Myners report, UK pension funds doubled the level of investment, according to the BVCA's report, which was produced by PwC, the financial services consultancy. The main beneficiaries of the investment were the UK's high-technology companies.

Overall, private equity funds raised £12.2bn, up 36 per cent on 2000. Of this, £5.2bn came from pension funds, with overseas funds - mainly from the US - contributing £3.6bn.

North American investors put £5.6bn into UK private equity specialists. The next highest amount was supplied by UK investors, with £3.5bn. Dutch investors contributed £517m - up from £343m - while German investors contributed £485m - up from £163m. Investors in mainland Europe put £2.1bn with UK private equity specialists - up nearly 40 per cent on 2000.

The BVCA said private equity funds' poor investment performance in 2001 - a -7.1 per cent return - still outperformed the record of total UK pension fund assets - -8.9 per cent - and all leading FTSE indices except the FTSE 250 - -6.7 per cent.

Private equity funds beat other benchmarks with a 13 per cent return over three years, a 15.7 per cent return over five years, and 17.4 per cent return over 10 years. BVCA Performance Measurement Survey 2001 and BVCA Report on Investment Activity 2001. Available from www.bvca.co.uk

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