City investment bank Peel Hunt has warned that the ‘shrinking pool’ of London-listed companies risks creating a downward spiral of slowing economic growth.
Peel Hunt said that continued mergers and acquisitions while companies shun London IPOs has led to a significant reduction in businesses listed on London markets. There had only been one significant London IPO this year: CAB Payments.
The number of companies making up the FTSE Small Cap Index has fallen by 21% during the past five years, while the number in the FTSE Fledgling Index is down by 28%. Peel Hunt said the numbers would be even worse if listed funds were excluded.
“In case anyone was thinking that this is due partially to some companies moving to AIM – well the AIM All-share has also contracted, with a reduction of 97 companies (12%) over the past five year,” head of research Charles Hall said.
Hall said serious work was needed to tackle the decline.
“There is a problem – There has been considerable de-equitisation of the UK market over a number of years and the pace is accelerating,” Hall said. “Reform of the listing requirements and research rules should help, but much more needs to be done to ensure that being listed is seen as an attractive option.”
He listed nine different negative consequences from the lack of listings. These are slower economic growth, reduced attractiveness of the UK as a listing destination, a reduction in sector peers, a negative impact on the professional services industry, lower corporation tax due to new ownership structures, lower attention from international investors, less ability to manage economic shocks, a focus on narrow ownership with firms owned by less people and a ‘circle of negativity’ where the previously mentioned factors only make listing in London less attractive.
Peel Hunt blamed “the steady withdrawal of funds from UK-facing portfolios”, as equity fund flows have been negative for each of the last 18 months.
“The UK used to have a thriving UK small & midcap sector, which was theenvy of most other leading markets,” Hall said. This position has been materially undermined and squandered, which is to the detriment of UK PLC and the overall attractiveness of the UK as a financial powerhouse. As markets increasingly globalise, there is a clear risk that the relevance of the UK small & midcap market continues to diminish.”
Work is already underway to help make the UK a more attractive place to list, including a simplification of listing rules and changes to how pensions will be encouraged to invest their funds. During the Spring Budget, Jeremy Hunt promised more plans would be laid out to boost the City in the Autumn.
Peel Hunt said these would help, but more work needed to be done. The research said the increase in corporation tax to 25% was “a material own goal”, and a graded version of the tax could be brought in as a politically feasible way to encourage UK listings.
It also said that a certain proportion of funds held in ISAs should be invested in UK listed assets, and that a sovereign wealth fund could be established to invest in UK businesses.
