Whither London?

Recent weeks and months have seen a rising tide of handwringing about the future of London as a venue for equity listings.

A number of important businesses are, or are contemplating, moving their primary listing to New York - CRH, Flutter, YouGov, Smurfit Kappa - and prestigious IPO candidates such as ARM Holdings are preferring New York over London. The overall size of the London stock market has also declined.

As William Wright points out in the recent New Financial “Rethinking Capital Markets” paper, the number of UK listed companies has nearly halved since 1997, the amount of money raised has fallen in real terms by a third over that period and the UK market now trades at a 45% discount to the USA.

This is all pretty gloomy stuff, particularly for those of us who lived through the post Big Bang flowering of London. In the words of Graham Nash, “I used to be a king and everything around me turned to gold.”

There are various reasons for this but a pivotal factor is the pull of New York. As Philip Augar pointed out in his recent FT article “How the US is crushing Europe’s domestic exchanges”:

“US equities account for nearly 70 percent of the MSCI World index…the US has scaled up the largest companies in the world in its own public markets, creating a colossal pool of recyclable equity capital residing in domestic and non-US investor portfolios. This has created a virtuous cycle of new listings from US and overseas issuers attracted by the depth and liquidity of that equity pool.”

The ongoing drift of notable companies to New York is, alas, inevitable but as Mr Augar points out that is all the more reason for London and other European markets to bolster their allure.

He sees this as important in nurturing markets in small and medium-sized companies headquartered locally, but that does feel a bit defeatist. We must surely look to retain a corpus of large and dynamic businesses listed in London and, more generally, to promote the UK as a venue for investment.

What to do?

Jeremy Hunt pointed out in his Mansion House speech in July that we need to fix the pensions system (both for the pensioners and to increase funding liquidity) and we need to make the UK a more attractive destination for listings. Indeed, the New Financial paper highlights two parallel crises:

1. while the UK pension system looks robust at first sight, there is a “storm brewing” for millions of people in the coming decades in terms of inadequate income in retirement; and

2. the structural decline in UK capital markets and long-term investment by UK investors has reached the point of crisis - with stock market stagnation, UK growth companies reliant on overseas investors and the UK having among the lowest rates of investment, productivity and economic growth of its peers.

In this piece I attempt a redux of:

• what is being done to meet the challenges;
• what more might be done; and
• other reasons to be cheerful about London which we might own and celebrate more fulsomely.

What is being done?

You do need a cold towel to keep up with the dizzying array of market reviews which we have had over the last three years.

We have had:

1. Lord Hill’s review of the Listing Regime which reported in March 2021 and recommended (i) allowing dual-class share structures to encourage founder-led growth companies to list in London, (ii) reducing the requirement for a free float from 25% to 15%, (iii) simplifying the prospectus regime and (iv) liberalising rules around listing of SPACs;

2. Ron Kalifa’s Fintech Review which was also published in early 2021 and proposed a 5-point plan as a “strategy and a delivery model for us to provide leadership in fintech”;

3. Mark Austin’s Review of secondary capital markets which reported in July 2022 and proposed a number of reforms to facilitate easier secondary capital raising and the appointment of a Digitisation Taskforce to drive forward modernisation of the UK’s shareholding framework;

4. Rachel Kent’s Review of investment research which was published in July 2023 and made various recommendations to improve the UK market for investment research; and

5. much work done by the Financial Conduct Authority, most notably the consultation published in May 2023 proposing a single listing category to replace the Premium and Standard categories, removal of the need for a three-year track record and abandonment of the need for shareholder approval for large and related party transactions.

Some of these reviews have led to change (for example, the initial suggestions around dual class share structures as deployed by Deliveroo). Some of the proposed relaxations, moreover, may be thought to favour unduly ease of listing over legitimate shareholder protection (for example around related party transactions). But, for sure, there remains a forest of detail to navigate.

Hence the commissioning of Sir Nigel Wilson’s Capital Markets of Tomorrow report by the Capital Markets Industry Taskforce is welcome. It aims to “provide an overarching framework that supports the future evolution of our markets” and “pick the best of the best” from the existing reports.

It will be awaited with impatience.

But the big question is whether listing reforms, however well intentioned, will make a meaningful difference. Are they, whisper it, “in the noise”? City AM quotes James Ashton who leads the Quoted Companies Alliance thus:

“It would be churlish to reject all the work that is going into ensuring London’s markets are fit for the future. But as company numbers continue to decline, more must be done to get them functioning better right now.”

In terms of the “more right now” theme (and aside from suggested pension reform), there are a couple of elements of Jeremy Hunt’s Mansion House Reforms to mention:

1. a compact with nine of the largest providers of defined contribution pensions to allocate at least 5% of their default funding to unlisted equities by 2030, potentially increasing investment by £50bn. This is a good start, but there is a lack of clarity as to how it will work. It is not focussed on unlisted UK companies (although to require that might complicate fiduciary duties), there is no central vehicle to facilitate investment at scale and it would seem to cover both private equity and venture capital (when you might hope for more growth in the latter);

2. simplification of the UK prospectus regime, abolishing rules such as the share trading obligation and double volume cap, reforming equity research in the light of the Rachel Kent Review and launching in due course an intermittent trading venue as a hybrid between public and private markets. This all feels helpful but might some of these elements cut across more “holistic” reform which we might hope to emerge from Sir Nigel Wilson’s work? And it is not “more” in the sense that James Ashton probably has in mind.

What more might be done?

I would suggest 4 areas which the Government should be looking at further, in addition to bringing home an approachable and user-friendly reform package around listing rules and regulations.

Pensions

As I allude to above, it is generally accepted that pensions reform is essential. As William Wright says in the New Financial report https://newfinancial.org/wp-content/uploads/2023/09/2023.09-UK-capital-markets-a-new-sense-of-urgency-New-Financial.pdf, this is necessary to “help create a virtuous circle of investment and growth and to help drive the long-term prosperity of the UK”.

The Mansion House Reforms around pensions consolidation are welcome but the New Financial report, which I commend to you, goes further in proposing more far-reaching suggestions for pension reform.

The starting point is that “UK pensions have had their risk appetite kicked out of them by the cumulative impact of well-intentioned regulatory reforms”. Thus, pension monies have moved out of equities and into bonds with the aggregate allocation to UK equities falling from 53% in 1997 to 6% now. The double-whammy effect has been lower pensions for individuals and much less liquidity in UK equities.

The report makes a number of suggestions for short, medium and longer term reform and two of the more exciting longer-term ideas (if we can say that about pensions) are:

1. creating a universal pensions and investment account for every individual in the UK (ideally linked to their National Insurance number) as a single flexible vehicle for their pensions, savings and investment products over the course of their lives. This would remove the need for anyone to set up a pension account and, the report suggests, kick-start a new era of retail investment; and

2. accelerate the consolidation of Defined Contribution schemes with the aim of building a system of some 20 “super trusts” with around £50bn in assets in each, closer to the Australian system. This would facilitate much broader asset allocation without increasing costs.

One general countervailing point on pension reform not to be forgotten, however, is that trustees of Defined Benefit schemes may prefer to stay in bonds – because they are matching liabilities which are maturing – rather than switching in quantity to equities.

Building a better investment climate

It is of course all very well to have ideas around capital markets and pensions reform, but they will not have much impact unless the UK is an attractive investment proposition.

Sadly all the vacillation around 2030 or 2035 for EVs, the phasing out of gas boilers and the future of HS2 is symptomatic of the lack of a predictable UK infrastructure and industrial strategy.

What are the UK’s priorities which go beyond electoral cycles and how can it be more efficient? For example, William Wright tells us that the UK spends five times as much per mile on rail, tunnel and road infrastructure as comparable markets.

Executive pay

One element in the attraction of New York is that CEOs of leading companies are paid materially more. Julia Hoggett, CEO of The London Stock Exchange, issued a statement in May bemoaning the lack of a level playing field and calling for a “big tent” debate on the topic:

“Often the same proxy agencies and asset managers that oppose compensation levels in the UK support much higher compensation packages in different jurisdictions, notably in the US.”

Senior executives of leading FTSE companies are well paid for sure but the disparity with the US means that London loses senior talent - think Laxman Narasimhan’s move from Reckitt to Starbucks - and is inevitably a factor in companies considering moving their listings to New York.

So let’s see what emerges from the big tent discussions which Ms Hoggett is promoting among corporates, asset managers, the proxy agencies and the FRC.

Tax

A number of tax changes could be made to incentivise London listings and UK investment. For example:

1. you might link the tax and other benefits which insurance companies, pension funds and ISA and SIPP investors have to UK investment;

2. you could, as James Ashton has suggested, abolish UK Stamp Duty on share trading; and

3. you might offer additional tax incentives to groups headquartered in the UK with a primary London listing.

Other reasons to be cheerful

London remains a genuinely vibrant city. Friends from the US tell me that, post-Covid, it is buzzier than New York. It is impossible to get dinner reservations and the music, theatre and art scene is exceptional. Brexit has complicated things (and, alas, a number of asset management professionals have relocated to Dublin, Paris or New York), but London remains a magnet for talent and tourists.

Moreover, as Jeremy Hunt observed in his Mansion House speech, the UK financial and related professional services industry employs over 2.5 million people and although two thirds of them live outside the South East it has made London the second largest financial centre in the world. Whilst the rise of US banks, private equity houses and law firms in London over the last decade has been inexorable, presenting challenges for home grown firms, we should celebrate the fact that London is their European centre of choice.

The draw of London’s higher educational establishment is also impressive. Imperial College is ranked in the top ten of universities worldwide (Oxford and Cambridge are numbers one and three) and LSE, UCL and Kings also rank highly.

So, whilst there is definitely much to do to reboot the UK capital markets and London’s role as their nerve centre, we should keep the good stuff in mind and lean into the challenge. As Whitney Houston says, we need to take it:

“Step by step

Bit by bit

Stone by stone

Brick by brick”

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

Send this article to a friend...