It has engulfed the UK economy in tremendous uncertainty; an uncertainty that has often paralysed the day-to-day functioning of business.
This uncertainty and paralysis has gripped public markets, and has undoubtedly been one of the contributing factors in the hesitancy towards them. Since the turn of the year, there have been as few as seven initial public offerings (IPOs) on the Alternative Investment Market (AIM) – the sub-market of the London Stock Exchange and home to nearly 900 small and mid-cap companies.
But is there optimism on the horizon? Will the forthcoming general election help to bring an end to the paralysis that currently grips the UK’s political and economic spheres?
Whilst there is a great deal of conjecture, the answers to these questions are merely speculative and largely unknown.
What we can be sure of, however, is the need for a government that prioritises the growth required to provide economic stability, and to create jobs and wealth. This remains crucial for all companies and the UK economy.
At a certain stage of development in any successful privately-owned company’s growth journey, consideration will be given to whether the next natural step to make is the transition to a public market. This decision is an incredibly important one, and one that requires meticulous and diligent forethought. Smaller companies who have exhausted the capital available to them in private equity and are looking to further the growth of their company, will often consider floating to generate the required capital to expand.
Floating on AIM, for example, can present a company with considerable opportunities unavailable to it in the private sphere. For instance, a company can benefit from increased access to capital, improved profile and access to liquidity. Yet, many companies remain averse to the idea of floating,
due, in part, to the costs associated with it. There are many preconceptions that exist, but how expensive really is it?
Research into AIM conducted by the Quoted Companies Alliance in February 2018 confirms these assumptions. The research analyses the costs of floating and maintaining a quotation on AIM, and estimates that it will cost a company between £580,000 and £1.2m.
These costs are a combination of admission, legal and public relations fees, as well as fees relating to the appointment of a range of advisers in order to ensure the company satisfies rules and complies with regulation. As part of this, there is a need for the company to persuade investors of its potential in order to raise money and ensure its success.
However, the above demonstrates that the process of floating, maintaining a quotation and thus raising equity is not an inexpensive or straightforward one. The costs are particularly pronounced for small and mid-size companies, and are often a major disincentive to them seeking a listing on a public equity market.
Many European regimes provide some form of relief for companies raising equity finance, but the UK currently does not. The provision of tax relief for the costs of raising equity up to a certain threshold would go some way to reduce the costs of floating on AIM and hopefully encourage a greater number of smaller companies – who are often financially weaker than larger, more established companies – to consider using public markets to finance their growth and development.
Targeting tax relief for SMEs for both IPOs and secondary fundraisings, as well as allowing the fundraising costs associated with raising equity to be deductible will make the costs of going public more equitable and less demanding for smaller companies.
This allows smaller companies – which play a crucial role within the UK economy – to benefit from the full potential of public equity markets and raise capital more cheaply and efficiently.
Any cost to the Treasury will be offset by the creation of employment and wealth that will drive sustainable economic growth and support widerfinancial stability, all of which remains so crucial in this period of uncertainty.
As politicians prepare to lock horns for the impending general election, the political parties have the opportunity to override this uncertainty, if they were to enshrine a commitment to leverage the full potential of public markets within their manifestos.