So just before 9pm on Monday evening, the Chancellor stood up at the Mansion House to deliver his pivotal speech that would detail how London was to salvage its position as a capital-raising venue of choice.
Indeed, there was lots to applaud, most notably pension funds agreeing to invest as much as £50 billion into UK growth companies. The theory being it helps keep those businesses conceived by domestic talent rooted to the local market rather than fleeing Stateside or succumbing to a trade sale. In turn, that delivers value — and tax revenues — back to the UK, but at what cost to the free market? As noted on Monday night, for the City of London to succeed it needs to stop eating itself. At Mansion House they seemed simply to be oblivious to such calls, and it was more a case of getting stuck into the main course — with aplomb.
The Chancellor said that “we will establish a pioneering new intermittent trading venue that will improve private companies’ access to capital markets before they publicly list”. The use of the word “we” suggests to the casual observer that this is a Government initiative, but just two months ago the London Stock Exchange announced that it would launch what it termed an Intermittent Trading Venue for pre-IPO companies. And I’m reliably informed that the LSEG’s statement to media welcoming the news came out as the Chancellor was mid-flow.
There wasn’t so much as a passing attempt to make this look like even an arm’s length association, with the two sides acting very much in lockstep. Although perhaps mindful of his career outlook, Mr Hunt may well be on the search for a new paymaster…
The initiative to get pension funds into growth companies has been snappily termed “The Mansion House Compact”, but it’s the apparent compact between state and a monopoly private enterprise that deserves closer inspection. It’s certainly looking rather menacing and at odds with traditional Conservative party viewpoints of how markets should function — are we once again being told that Nanny knows best? For growth companies to have any hope of tapping into the £50 billion pot of pension cash, is the expectation that they will have to list on the Government-endorsed, LSEG-run, Intermittent Trading Venue? For context, it’s estimated that the total value of all UK companies — both public and private — is in excess of £10 trillion, but how would the inflow of such a significant volume of capital impact valuations if it’s not spread across the board, reaching right down to a grassroots level? That £50 billion is, after all, sufficient to buy up the smallest 900 companies already listed on the London Stock Exchange.
Monday night’s speech highlighted that the nine largest defined contribution pension providers had agreed to invest in UK growth companies, with the expectation that the remainder will follow. But if these institutions end up feeling obliged to only invest in a small cohort of businesses who can afford the fees associated with being part of an LSEG vehicle, can fund managers honestly claim they are meeting their fiduciary responsibilities when it comes to retail customers? Or does this end up being a closed shop and a box-ticking exercise where retail investors are overpaying not just by virtue of demand outstripping supply, but also as they are the ones on the hook when it comes to covering the ongoing administration fees? After all, the growing financial burden is a key reason why many companies have turned their backs on public markets and instead returned to private ownership.
The list of attempts to reinvent capital markets is far from being a short one. Some have found success, but many more have failed, battling against regulation, capital requirements, market counterparties keen to make a fast buck and indeed the established legacy players themselves. There’s no doubt that we need more competition in financial markets as this is what counts when it comes to fostering innovation in the long term. Strong-arming institutional investors into the reallocation of capital certainly isn’t a menu for success in the long term.
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