Picture this: James Bond, our quintessential MI6 agent, decides after years of rigorous training in London, to serve the CIA in America. An audacious move, considering he’s the very embodiment of Britishness, and his departure would no doubt prompt others to follow suit: betrayal of the highest order.
While not quite in the realm of high treason, the conveyor belt of homegrown companies, trained in the British market environment yet looking elsewhere for their big listing, should create a similar uproar.
Over the past five years, the number of companies listed on the FTSE 100, FTSE 230, SmallCap and Fledging indices has fallen by 20%.
Of the 125 IPOs on the LSE that we tracked since 2020, 103 are below their IPO price. The median loss is 55% and this excludes those business such as Made.com where investors lost all their money.
The UK is suffering from a lack of growth and productivity when compared with our international peers, as pinpointed by The Growth Commission and Liz Truss, and the efficacy of our capital markets in addressing productivity stands questioned.
UK business investment as a percentage of GDP, which was an impressive 19% in the early 2000s, has fallen to 17%, lagging 6% behind our peer group. Just to put things into perspective, even the
MPs pension fund has minimised its investments in UK equities. Small companies, the very heartbeat of our economy, find their wings clipped due to limited access to capital.
This discernible trend of decline has ignited intensive introspection both in the City and Whitehall which Jeremy Hunt’s ‘Mansion House’ speech in July promised to address with a suite of regulatory modifications.
Among the announcements were amended listing rules, initiatives to motivate pension funds to focus on British equities, and, crucially, the endorsement of all recommendations from the Investment Research Review into British research, spearheaded by eminent city lawyer, Rachel Kent.
The latter is pivotal, as a glaring issue dampening the City’s recent prospects has been the dwindling state of investment research, crucial for informed financial decisions. Big firms have reduced their research budgets significantly, causing sparse coverage for UK SMEs. With scanty research, capital allocation is suboptimal. Unaware of potential gems, asset managers overlook them, causing innovative businesses to remain overshadowed. Insufficient research can also misguide valuations, compelling IPOs to consider alternative listings. This sentiment was evident when WE Soda, a prominent firm, aborted its LSE IPO due to perceived undervaluation.
Such incidents amplify the notion that UK’s capital markets are ill-equipped to ascertain accurate valuations. Consequently, UK stocks suffer, trading at an approximate 20% discount against their global counterparts.
However, the Investment Research Review proposes an on-demand research platform. Imagine a platform akin to Netflix, but for investment research.
The mechanism is simple yet effective: issuers contact the research platform, get a shortlist, select their preferred firms, sign up to a code of conduct, and then indulge in two years of insightful research. This research, unbiased and authentic, is poised to rejuvenate the capital markets.
Envisioned to host multiple analyst reports for companies, this could be instrumental for SMEs struggling for analyst attention.
Further proposed changes include categorising investment research costs under execution costs, broadening retail investors; research access, fostering issuer-sponsored research, simplifying sector regulations, and enhancing research during firm IPOs.
An overhaul of arbitrary market cap limits is also in the offing, catering to the diverse needs of research. By democratising access to investment research, bridging the knowledge chasm between retail and institutional investors, its quality and volume are poised to escalate, subsequently raising its market value. These proposed reforms promise to invigorate the sector, fostering rejuvenation of Britain’s capital markets, reviving the City, and by extension, bolstering the UK’s economy.
Rachel Kent’s recommendations also advocate for a shift away from the unbundling rules of MIFID II.
This flexibility in accessing non-UK research can fortify our alliance with US rules, giving us an edge over the EU, which is itself navigating a labyrinth of bureaucracy.
But it’s not all sunshine; the unbundling rule revisions are not a magic fix. Asset managers, now more discerning about research inputs, won’t easily revert to old ways.
Fund level transparency on research budgets will also be the order of the day. This initiatives funding mechanism, anticipated in the November 2023 Autumn Statement, will provide further clarity.
The longer there remains uncertainty around the LSE’s ability to retain homegrown companies, the more pressing the need for immediate reforms and we must collectively embrace innovation or risk further stagnation. The City is keen for its renaissance. We must make sure it happens.
Neil Shah is a director of Edison Group
