UK Capital Markets in Need of Rejuvenation, Report Suggests
In recent years, the UK’s capital markets have been facing a decline in growth and productivity, prompting concerns about their ability to support the country’s economy. A report by the Investment Research Review, spearheaded by prominent city lawyer Rachel Kent, has highlighted the need for regulatory modifications and innovative solutions to address these challenges.
The report reveals that the number of companies listed on the FTSE 100, FTSE 230, SmallCap, and Fledging indices has dropped by 20% over the past five years. Additionally, out of the 125 Initial Public Offerings (IPOs) on the London Stock Exchange (LSE) since 2020, 103 are currently trading below their IPO price, with a median loss of 55%. These figures exclude cases such as Made.com, where investors lost all their money.
The UK’s business investment as a percentage of GDP has fallen to 17%, lagging 6% behind its peer group. Even the MPs’ pension fund has reduced its investments in UK equities. This lack of investment has particularly affected small companies, which struggle to access capital and contribute to the country’s economic growth.
Jeremy Hunt’s ‘Mansion House’ speech in July acknowledged the need for regulatory changes. The speech outlined amended listing rules and initiatives to encourage pension funds to focus on British equities. However, one crucial aspect that Hunt highlighted was the importance of investment research in making informed financial decisions. The decline in research budgets by large firms has led to limited coverage of UK small and medium-sized enterprises (SMEs). As a result, asset managers overlook these businesses, causing them to remain overshadowed and undervalued. Insufficient research can also misguide valuations, leading some companies to consider alternative listings. WE Soda, for example, recently abandoned its IPO on the LSE due to perceived undervaluation.
To address this issue, the Investment Research Review proposes the creation of an on-demand research platform, similar to Netflix but for investment research. The platform would allow issuers to contact the research platform, choose preferred firms, and engage in two years of insightful, unbiased research. This initiative aims to rejuvenate the capital markets, provide coverage for SMEs, and improve valuations.
Other proposed changes include categorizing investment research costs under execution costs, broadening retail investors’ access to research, fostering issuer-sponsored research, simplifying sector regulations, and enhancing research during firm IPOs. The review also suggests an overhaul of arbitrary market cap limits to provide more diverse research opportunities.
The report also advocates for a shift away from the unbundling rules of the Markets in Financial Instruments Directive II (MIFID II). This flexibility in accessing non-UK research could strengthen the UK’s alliance with US rules, giving it an advantage over the EU’s bureaucratic processes.
However, it is important to note that the unbundling rule revisions alone are not a magic fix. Asset managers, now more discerning about research inputs, are unlikely to easily revert to previous practices. Fund level transparency on research budgets is also expected to become more prominent, providing clarity on the funding mechanisms.
The report emphasizes the urgency of immediate reforms, as the longer the uncertainty around the LSE’s ability to retain homegrown companies persists, the more pressing the need for change becomes. The City is eager for its renaissance, and embracing innovation is crucial to avoid further stagnation.
As the UK navigates its post-Brexit future, revitalizing its capital markets will play a vital role in driving economic growth, attracting investment, and ensuring the country remains competitive on the global stage.
More detail via Evening Standard here… ( Image via Evening Standard )