Providing patient capital to small, growing companies is essential to create sustainable growth in our economy.
The Government recognises this and recently put out a consultation on how the UK can better finance innovative firms.
Some worrying trends make the consultation particularly important, and Brexit seems to make every issue more urgent. While no one threat stands out, markets are threatened by many small issues that damage the ecosystem over time.
Despite good work by the UK’s growth exchanges, the number of companies accessing public markets in the UK has declined steadily over 10 years. There are now 41 per cent fewer AIM companies and 31 per cent fewer on the Main Market of the London Stock Exchange.
Inevitably, there have been delistings and OECD research indicates a scarcity of smaller companies joining the markets. Also, the average size of IPO companies has risen significantly, indicating that the cost of accessing public equity capital is becoming too high for growth companies.
This suggests many UK firms could lack the long-term finance that they need to scale up successfully. This could negatively impact national productivity in the coming years.
Another cause is the decline in investment by pension funds. They accounted for 21.7 per cent of quoted shares by value in 1998; this fell to 3 per cent in 2014. This signals a shift from active investment in innovative, growth companies to passive allocation to low-risk, steady yield investments, such as Exchange Traded Funds (ETFs).
ETFs favour larger listed, those FTSE 100 companies as high liquidity is a key requirement for ETF activity. These companies fall generally not at a high-growth stage of development and do not tend to require public equity to finance their growth or working capital.
The short-term horizons of investors and their clients is another major barrier to the supply of patient capital. Companies are under pressure to achieve growth forecasts and deliver immediate returns to investors. This often leads to companies avoiding strategic investment which is in the long-term interest of patient investors.
Any Government measures to address these problems should recognise that investing requires patience.
Firstly we’d like to see raising equity treated the same as raising debt in taxation terms, so companies have a greater incentive to raise finance on public markets and promote long-term economic stability.
At present inheritance tax relief is available only to individuals investing in quoted companies not on the Main Market of the London Stock Exchange, effectively favouring the largest AIM companies. Extending this break to funds as well as individuals would encourage investment in more qualifying AIM and NEX companies.
Funds could invest in smaller, less costly companies, not only spreading capital allocation and risk but also creating increased liquidity and investment in smaller growth companies.
The prospectus rules should be amended soon after Brexit so capital markets are calibrated specifically for the UK, enabling British companies to access finance more easily.
We also want the Financial Conduct Authority to adopt a more sympathetic approach to smaller listed companies on the Main Market. At the moment all companies on the Main Market of the London Stock Exchange are treated the same, whether they have a market capitalisation of £50m or one of £100bn.
A more considerate approach would make regulated markets more attractive for smaller companies, widening the investment population for pension funds that can only invest in listed shares.
As we see there is no simple solution. These examples are a few among many that would help create markets where entrepreneurs can fulfil their business dreams and where investors can benefit, patiently, from them.
And as Homer said, you have to be “wise to resolve and patient to perform”. So let’s hope that our Government can be wise and our markets perform.
Tim Ward is Chief Executive of the Quoted Companies Alliance, the independent membership organisation that champions the interests of small to mid-size quoted companies.