The UK economy and financial markets are facing various shocks, not seen on a scale like this in a very long time. Some of these are based on the geopolitical events happening in the world but some are of their own making. Examples include fewer Initial Public Offerings in the UK markets and lack of liquidity in the UK secondary stock markets like AIM, UK pension funds investing less in UK equities while also looking to sell off unlisted private market assets related to private equity and real estate, numerous changes in the existing government and a probability that a Labour government will come to power in the next general election, bringing with it rising taxes in an already difficult economy plagued with inflation, high interest rates and rising consumer prices.
There are several reasons why companies have chosen to list in the US rather than the UK, including the geographic location where most of the listing company’s revenue is derived, valuation spreads between the US and UK, poor liquidity and consequently poor trading volumes and, of course, regulation. Whilst some of these reasons are more difficult to close the gap on, between the US and the UK, regulation is one that could potentially be addressed. According to an article in the FT, the reasons Softbank decided to list ARM in the US rather than the UK included the Financial Conduct Authority’s requirement for listed companies to gain investor approval for all related party transactions. In the US, companies only need to report these transactions, without the need to secure approval. Additionally, the FT said Softbank had been discouraged by the complexity and costs associated with maintaining a London listing. Perhaps part of getting more companies to list in the UK and to increase the UK financial markets’ international competitiveness could be some modifications to the FCA’s requirements. Additionally, alternative/secondary markets, where smaller companies so often list, tend to suffer from limited liquidity, where the liquidity has moved from equities to bonds, the valuation of virtually all non-profit generating UK stocks, which is deeply discounted, and the fact that they do not in general attract UK pension funds.
Those pension funds are typically selling unlisted private market assets as these assets become more difficult to value, having been primarily invested in infrastructure and real estate. According to the Office of National Statistics, as of 31 March 2022, in aggregate, all pension scheme types had assets of approximately £2.5 trillion. In many cases the pension funds would benefit from revisiting their allocation to unlisted private market assets with potentially a view to investing more extensively in UK high growth companies, like their international competitors. This would unlock a substantial amount of capital to invest in new UK companies with compelling new products and technologies that might have the capability of becoming the next generation of global leaders in industries such as technology and healthcare. This move would also provide to UK pension holders the opportunity to participate in outsized returns that they have largely missed out on, with the existing technology leaders as an example.
Private Equity, a form of private capital, has evolved quite substantially over the past few years. Playing both sides of the table, private equity is not just investing equity from its funds to acquire businesses, but it is also extending private credit/debt finance to companies to boost returns, not just from the return on equity investments but also from interest payments from the debt financing. Private credit is an additional area that UK pension funds should look to diversify into.
The Autumn Statement, which is due to be delivered by the Chancellor, Jeremy Hunt, on 22nd November, is likely to touch upon several areas, but certainly including tax and government spending plans. Hopefully it will not be something just to give the markets a boost as part of electioneering, but a clear path to economic stability and growth for the UK economy. The way forward should include regulatory reform and efficient corporate and individual tax policies which encourage the taxpayer to save and to invest more in the UK economy. Inflation appears to be slowing, but GDP has been stagnant and recessionary signals are evident; nevertheless, there is still time to turn the ship around with the right policies which encourage private capital to invest directly in UK growth companies and to participate in the upside from these investments. Perhaps it’s time the government focused on the issues it has internally, transforming the UK public services sector and giving private capital the necessary tools to deliver positive economic growth.