Labour report – The Labour party has published its Financial Services Review, headlined ‘Financing Growth’. There is explicit support for the financial sector: “We will unashamedly champion our financial services sector as one of the UK’s greatest assets”.
Equity capital markets – There is clear recognition of the challenges in UK equities and the need for government action to reverse the decline.
Ce qui est bon pour l'un est bon pour l'autre – We can learn a lot from France in terms of encouraging investment in growth, from the Tibi, to the PEA, to stamp duty.
Our view – The review looks a sensible, progressive blueprint. Importantly, it looks to build on many of the recent regulatory changes rather than disrupt progress. Most important there is a clear drive to accelerate growth and a recognition of the financial sector’s central role in enabling investment. In particular, the Tibi mechanism looks compelling in terms of directing investment to UK growth companies (both public and private).
The report has a section entitled ‘Reinvigorating our capital markets’, which highlights the sharp decline in listed companies and the importance of capital markets in driving innovation and investment. It recognises the central role that pensions have played in de-equitisation, to the detriment of companies and pension savers. Labour broadly welcomes the recent regulatory reviews and intends to ensure they deliver the intended outcomes. In addition, it is undertaking further work to assess “additional policy required to increase investment by institutional and individual investors in UK capital markets”. It sees the central tenets of strengthening capital markets as:
- Pension and retirement savings review
- Consolidating pension and retirement saving schemes
- Giving the British Business Bank a more ambitious remit
- Establishing a British Tibi scheme
- Unlocking capital from Solvency reforms
- Increasing retail participation in capital markets
A British Tibi
This would be designed to enable defined contribution pension funds to invest a proportion of their assets in UK growth assets, split between:
- Venture capital
- Smallcap growth equity
- Infrastructure investment
An oversight committee would manage the scheme, drawing up a list of venture capital and UK smallcap funds to make the investments.
Learnings from French initiatives
The Tibi initiative (named after Philippe Tibi) was introduced in 2020, with institutional investors pledging to invest €6bn over three years. The focus was to fill a funding gap for technology companies, and it has been seen as delivering against its primary aims. In 2023, the initiative was extended, and is to provide an additional €7bn over the following three years.
A total of 60 funds have been validated for non-listed companies and 26 for listed companies. Given that all of these are French businesses, this initiative has also expanded the asset management ecosystem in France.
Here is the initial 2019 report by Philippe Tibi. The focus was on innovation to improve GDP, productivity and employment, as well as increase the tax and social security base. It recognised that many innovative companies were having to look overseas for funding or to sell out before reaching maturity. There was also a recognition that the lack of home-based funds meant that the best French companies were choosing to list on NASDAQ. The report also recommended encouraging French investors to be cornerstone investors in IPOs in France and for this to become standard practice.
The initial review of the Tibi took place in June 2021 and found that (despite Covid) €3.5bn had been pledged with third-party investors, taking the total to more than €18bn.
Examples of companies being funded include IziWork (a mobile app), which raised €35m, Payfit (payroll software), which raised €90m, and SparingVision (eye diseases), which raised €44.5m. The initial intention was to develop domestic money, but this has since been expanded to attract overseas investment.
France introduced a saving scheme for retail investors (known as the PEA) in 1992, which is focused on encouraging investment in equities. The latest data we have seen reported that it had grown to 6.6m accounts in 2020, with €112bn of assets. Importantly, the savings need to be invested in Europe-listed shares (or funds investing in European equities), ensuring a focus on home markets. Similar to the ISA, dividends and capital gains are exempt from tax.
France also has a PEA dedicated to financing small and midsized companies, with a market cap of less than €1bn at the time of acquisition. The PEA-PME was introduced in 2014, is separate to the PEA, and has a maximum deposit of €15,000. It has raised over €700m for investment in small and midcap companies since inception, and has a five-year holding period to be tax exempt.
France has a 0.3% rate of stamp duty on shares (vs 0.5% on listed shares in the UK); however there is no charge for smaller companies with a market cap of <€1bn.
Labour intends to increase retail participation in the equity market. This includes simplifying the ISA product range to increase stocks and shares ownership. We see the advent of a British ISA as central both to encouraging retail participation in the equity market and attracting investment for UK companies.