UK equity markets are vital, but need to be revitalised

Taken for granted – It is often taken for granted that equity markets function effectively given they reflect investor appetite, the long-term performance of economies and companies, and are always open to transact. However, it is increasingly apparent that the UK equity market is diminishing in importance and there is clear recognition that change is required.

Does this matter? – We believe the importance of a thriving and fully functioning UK equity market should not be underestimated. In this note we discuss the benefits of the market to companies, investors and the overall economy.

Action required - The malaise in the UK equity market is deeply set and fundamental change is required to stimulate this vital part of the economy. Although the overall UK market needs attention, it is the small & midcap sector where revitalisation is urgently required. We make several proposals (eg ISAs, pensions, CGT, IHT, stamp duty), with the key emphasis being to increase the overall economy to the benefit of all stakeholders.


Importance of the UK equity market – Although the UK market has diminished in global importance, it still has c.£2.6tn of equity value and 1,346 constituents in the main market and AIM. These are held by a broad spectrum of investors, from pension funds and wealth managers to charities, insurance companies and individual retail investors. As such, capital growth and shareholder returns are key drivers for funding day-to-day spending and increasing savings. However, the UK is now a minnow in a global context, with just 3% of global equity market capitalisation (from 5% five years ago) and a shrinking pool of companies and assets.

UK small & midcap in a doom loop – This area of the market is in a vicious circle, with a declining number of companies (down >20% in five years), reducing level of market cap (down c.40% in five years) and reducing liquidity. There has been a steady stream of withdrawals from UK equity funds, particularly felt in the small & midcap space. This is causing the reduction in liquidity, the depression in valuation, the exit from the market and limited funds for IPOs and capital raises. This has material implications for funding the expansion of UK growth companies and the whole ecosystem around them. This matters because they are an important contributor to UK Plc and should be the large companies of tomorrow.

Attitude to risk – This is at the heart of so much that has undermined the performance of the UK over the past 20 years. Risk has dominated the agenda and is seen as the key driver for an appropriate regulatory regime. What it has actually done is committed UK pension funds to long-term underperformance, has restrained companies from raising capital and investing in growth, and has not credited retail investors with an ability to understand financial products and investments. The tide is turning with a number of regulatory reforms, but much more could be done to stimulate investment to the benefit of companies, investors, pensioners and the overall economy. Clearly regulation has its place, but not at the expense of depressing growth and investment.  


In this report we address:

·         The benefits for companies of being quoted.

·         The benefits to shareholders.

·         The contribution listed companies make to growing the economy.

·         The sharp decline in the number of listed companies.

·         The reasons for negative perceptions around being listed.

We also discuss a number of solutions to improve equity markets and to grow the size of the UK economy for the benefit of all stakeholders.

·         Accelerate supply side reforms to make being listed more attractive and more flexible.

·         Introduce research platforms to enhance coverage of small & midcap companies.

·         Enable retail investors to access research and participate in market activity.

·         Reform corporation tax to accelerate the growth of small & midcap companies.

·         Mandate a proportion of ISAs and SIPPs to invest in the UK in recognition of the tax benefit.

·         Add an ISA allowance dedicated to small & midcap companies.

·         Extend the stamp duty exemption and IHT rules from AIM to listed smaller companies.

·         Extend the Mansion House Compact to include small & midcap companies as well as AIM.

·         Extend the initiative for LGPS to have 10% in private equity to include small & midcap companies.

·         Accelerate the growth of superfunds to enable a greater focus on growing assets.

We believe a combination of these proposals would turbo charge the UK equity market, encourage economic growth and enhance tax revenues, as well as making the UK a more attractive market for inward investment. However, it is essential that measures are put in place in the short term to ensure that the current malaise does not worsen. The good news is that most of these can be enacted quickly and the impact felt quickly.


Benefits of being quoted

Access to permanent capital

The low cost of finance over the past 15 years encouraged a belief that debt funding was preferable and inherently more attractive than equity funding. This may have been true in the short term, but the advantages of equity funding in the long term are compelling. Once secured, equity funding is permanent, it does not carry a variable coupon, does not need refinancing, has no funding tests and cannot be withdrawn. The last three years have demonstrated the importance of equity funding.

·         During the Covid period, equity investors provided >£30bn of permanent capital to companies, enabling most to sustain their businesses through a very difficult period and to emerge in a stronger position. As such, listed companies had a materially lower requirement for government finance than unlisted business, with many of them paying back government support in a relatively short time period.

·         Listed companies have generally been better positioned to manage the sharp increase in funding costs over the past year, as well as the reduced access to finance. Equity shareholders generally encourage companies to be appropriately financed to manage through tougher environments rather than be fully debt loaded to juice returns.

·         The funding positions of listed companies are available for all to see and emerging issues are relatively easy to identify. This is in marked contrast to private companies, where accounts are regularly filed long after the period under review and there is limited disclosure and analysis (Wilko being a recent example). There will be many companies in the private arena with material issues given the increase in funding costs and inability to raise additional debt. According to the FT, the FCA is intending to undertake a review of valuations in private markets in response to concerns over governance procedures and the impact of the increase in funding costs.

·         The ability to finance a company with zero long-term cost (post the initial raise) is a key competitive advantage which is regularly over-looked when compared to other forms of financing. Dividends are a reward for ownership, but these are voluntary and do not roll-up if passed.

·         Management teams in quoted companies are able to plan their business for the long term, whereas there is a clear life cycle for most private equity owned businesses. Clearly shareholders can become impatient for short-term returns but a well-argued and executed strategy is generally well supported.

Greater flexibility to finance acquisitions

Access to equity provides a number of additional routes to raising finance/completing an acquisition compared to private markets.

Acquisitions can be funded through shares, enabling the vendors to retain an economic exposure to the combined entity and allowing the acquiror to use existing resources rather than new equity or debt.

The vendors have an ability to sell down at a future date in the open market, having benefited from the recognition of any synergy benefits.

Additional equity can be raised through recourse to existing shareholders or approaching new shareholders. Generally, this can be achieved whilst protecting existing shareholders regarding dilution.

Although equity financing brings additional flexibility, the existing UK regulatory regime does create roadblocks, additional expense, a longer process and uncertainty of completion. These issues are being addressed through the Prospectus Reforms, which should re-balance the playing field.

Enhanced visibility

Being quoted undoubtedly brings increased visibility. Clearly this can be a double-edged sword as the visibility can attract criticism as well as highlight vulnerabilities or problems. Nonetheless, there are a number of benefits.

·         Suppliers and customers have greater ability to judge the company’s performance and culture. This is particularly important for smaller companies looking to expand overseas.

·         Quoted companies are generally in a stronger position to secure finance on attractive terms given the enhanced visibility of performance and cash flow.

·         The increased attention can make the company more visible and attractive to potential recruits.

·         The increased disclosure improves systems and controls and has greater recognition of the broader stakeholders. Inevitably, this does come with additional costs.

Ability to reward, retain & encourage employees

Although employees are rewarded through equity in private companies, the equity is generally tightly held by senior management and there is limited visibility or ability to realise the holding. In the quoted market:

·         Share schemes can enable broad shareholder ownership among employees, enabling them to have a greater sense of ownership and commitment.

·         Rewards can be structured to be at no cost to the company or to bring in additional capital on conversion, which is particularly helpful for younger, growing companies.

·         Rewards can be structured to drive behaviour, such as deliver growth, focus on cash flow or other targets (eg sustainability) and have long-term dynamics.

Executive rewards do receive a high level of scrutiny, which can be uncomfortable in the listed arena. There is also a concern that shareholders and proxy agencies do not recognise the reality that companies are increasingly global and are operating with a movable pool of talent. This area has been getting more commentary around the importance of ensuring talented executives are keen to work in the quoted arena.

Retention of management control

There is an impression that listing cedes control to a new set of shareholders, who may have differing ambitions or time horizons to the existing management team. Clearly (as in any business) underperformance needs to be addressed but, in general, equity holders are far more forgiving and supportive of management than is regularly perceived.

·         Equity holders generally allow management to set and execute their strategy with relatively little interference. Meetings are more for information and understanding than interrogation.

·         Management do not need to have material holdings in order to retain control.

·         There is no loss of equity participation in the event of a problem, whereas sweet equity can be quickly reduced in the private arena.

·         Management incentives are generally clearly set out and adhered to.

There has been a general increase in shareholder activism, but that is generally confined to larger companies and to very specific cases. 

Benefits to shareholders

Broad ownership

Equity markets enable everyone to have an opportunity to own a slice of the leading companies in the UK, as well as the smaller growing business. This is shareholder democracy in action.

Although ownership by UK investors has diminished as equity markets have globalised, there continues to be a high level (43.7% at Dec 2020 according to the ONS) with beneficial owners in the UK.

The ownership is spread across pension funds, charities, investment funds and retail investors, as well as government funds and insurers. The health and performance of our equity market really does matter to a wide range of investors.

Securing an exit

·         Many shareholders perceive the benefit of listing as the ability to take ‘money off the table’ either at the listing or in subsequent periods.

·         Many companies outgrow their existing investors and need to secure new long-term investors to deliver the next stage of growth.

·         The equity markets should be the natural long-term route for growth companies and private equity owned businesses, as is evidently the case in the US.

Access to capital

·         A key attraction for shareholders is the ability to realise investments in a sensible size and time frame. Clearly liquidity reduces the market cap spectrum, but equity markets are virtually always open, and trading with a market price is readily available.

·         The benefits of this were particularly apparent during the Covid period. Share prices were depressed and volatile, but markets remained open and investors needing access to capital were able to trade.

·         Private markets are inevitably more opaque and there is limited clarity of price or ability to time exit. This lack of price discovery can lead to holdings being incorrectly priced at a parent company level.

Regular income stream

·         Many companies clearly set out their capital allocation policies and, particularly their dividend policy.

·         Although these are not guaranteed, the general philosophy is that dividends are part of the rewards of ownership and can be reasonably relied upon.

A side-effect of the low interest rate environment was a substantial growth in income funds. In our view, this created an environment that was overly focused on dividends in the UK to the detriment of growth. However, many dividends were re-set during the Covid period and outflows from income funds have reduced the focus on distributions. We see a healthier balance now between investment for the long-term benefit of the company and rewarding shareholders.   

Our recent survey of a broad range of interested parties in UK capital markets found that 69% of participants wanted companies to retain more capital to increase investment in growth, rather than be returned to shareholders in dividends of share buybacks.

Benefits of equity markets to UK Plc

We see numerous benefits to UK Plc from fully functioning and growing equity markets including:

·         Source of funding for investment in growth.

·         Permanent capital enabling a long-term focus and ability to manage cycles.

·         A growing store of value for a broad range of investors (individuals, pensions, insurance, charities etc).

·         Source of income to fund current expenditure or build savings.

·         Significant contribution to government finances.

·         High level of visibility ensuring accountability and high standards.

·         Enhances the UK’s global reputation for rule of law, probity and responsibility.

·         Large ecosystem of service providers helping to grow the economy.

Contribution to the UK

The companies listed in the UK make a significant direct contribution to the country through:

·         Direct taxes (corporation tax, VAT, duties, levies, rates, employee NIC etc).

·         Collected taxes (PAYE, VAT, gambling duty etc).

·         Indirect taxes (stamp duty, dividend income, CGT etc).

·         Support for suppliers.

·         Support for service providers.

·         Ecosystem for investment specialists.

We are regularly asked whether it matters where a company is listed. There are clearly some companies that use a listing as a port of convenience, but for the vast majority there is a clear link to the country and a mutual responsibility, which is manifest in a number of ways.

·         Although there is a responsibility to manage a global business effectively, there is an inevitable focus on home markets in terms of scale of operation and investment. The proximity benefit is a material intangible.

·         Most companies that are listed in the UK retain their headquarters and senior team members in the UK. This generally provides greater opportunity for UK citizens to assume leadership roles.

·         The adherence to UK leadership and responsibility generally ensures an eco-system of service providers including financial advisors, accountants, lawyers, PR specialists, remuneration consultants, recruitment specialists etc. The importance of UK equities and markets ensures that the UK over-indexes in these specialisms, which then provides considerable opportunities in other markets to export our expertise. These businesses also provide considerable levels of employment to UK citizens as well as tax revenues.

·         The UK has a well-established asset management industry, not only for domestic businesses but also with major global investors having a meaningful presence in the UK. According to the Investment Association, its 250 members support 122,000 jobs and manage £10tn of assets. Some £1.4tn of those assets are UK investor funds (IA 2022 report).

·         The access to talent, language and time zone are natural advantages, but the scale and importance of the UK equity market also has an important role in terms of giving substance and focus to the asset management sector. This has been particularly apparent in the UK small & midcap market, where the number of asset managers and level of investment mirrored the size of the market. The diminution in this space is having a direct impact on one of our most successful industries.

These advantages are not a given – they need to be nurtured and sustained to deliver positive long-term outcomes. After all, the Antwerp stock exchange was the first to exist with the first modern exchange in Amsterdam in 1611, with the Dutch East India Company the first publicly traded company. The LSE did not start until 1698, the NYSE in 1817 and NASDAQ in 1971.

Contribution of quoted companies

Growing the cake

Many of the larger listed companies are mature businesses, which are typically focusing on costs to improve margins. This is generally manifest in reducing employee numbers. These businesses make a considerable contribution to society (through employment, tax revenues, dividends, ESG etc) but do not contribute much to growing the overall economy. This is in marked contrast to the US, where the largest companies are driving growth.

In the UK, it is the smaller companies that are generally expanding and raising capital for investment in assets and people. These are the businesses that need to be nurtured and supported as they should become the large companies of tomorrow. Unfortunately, many never reach this stage as they are acquired too early in their life cycle, with the rewards of growth going to people and investors outside the UK.

Companies quoted on AIM tend to be earlier in their life cycle than fully listed companies. As such, they should contribute positively to the overall economic growth of the UK. A report in 2020 from the LSE based on analysis by Grant Thornton calculated that in the five years to 2019, the direct economic contribution to the UK from these companies had increased by 35% to £25bn and that the number of jobs had increased by 22% to 430,000. They also had an increasingly global outlook, with overseas sales increasing from £7bn to £12.4bn.

However, that was then. At the end of 2019 there were 863 companies on AIM with a total market cap of £104bn – this has shrunk to 694 companies and £74bn today. This is due to a 23% reduction in the index since then, combined with companies leaving the market and being taken-over.

Tax revenues. Companies are key drivers of tax revenues, which comes from VAT, business rates, employee NI, corporation tax, stamp duty, CGT and taxes on dividends. Clearly these are paid by all companies, so here we will look predominately at the contrast between listed companies and private companies. The main differences are on corporation tax, taxes on dividend, CGT and stamp duty.

Corporation tax is the fourth largest source of government funds and generated £85bn, or 8% of total income of £1tn in 2022/23. This is the total level of tax from both public and private companies. Public companies typically have low levels of gearing (<2x net debt:EBITDA), whereas private equity owned companies generally run with higher levels (>6x). This means that quoted companies typically pay a higher proportion of corporation tax. For example, Asda & Morrisons are no longer paying corporation tax, whereas they used to contribute a combined c.£200m per annum. The increase in corporation tax from 19% to 25% in 2023 further increases the incentive to use debt to reduce tax. This has a double negative as not only are corporation tax receipts lower, but also debt funded companies typically focus on cash flow rather than growth through investment.

PWC’s survey of the 100 Group (which includes most of the FTSE 1oo and a few of the largest FTSE 250 companies) shows corporation tax amounted to £8.3bn in 2021/22, equating to c.13% of total corporation tax in that year, with a total tax contribution of £82bn (including rates, employer NIC, VAT, bank levy etc). The group employs 1.9m people, which is c.6% of the UK’s total workforce. The total employment tax (both borne and collected) amounted to £24.4bn or 7% of the total government receipts from this source. As discussed earlier, these businesses are generally mature and looking to reduce costs, hence there was a reduction in the number of employees of 0.9% in the period.

The total tax from the 100 Group has been very stable at c.£80bn over the past decade, as shown below.

Figure 1: Tax contribution  – 100 Group

Source: PWC

This is despite corporation tax reducing from 28% in 2008 to 19% in 2018. This reflects the benefits of stronger profit performance, growth in employment numbers and tax (eg NIC and VAT) and other taxes (eg the banking levy).

These companies paid a total tax rate (including taxes borne and collected) of c.40% last year, which will increase in 2023/2024, with the higher rate of corporation tax (due to add >£17bn) and increases in NIC.

Total CGT receipts amounted to £17bn in 2022/23, of which c.£2bn was collected from the disposal of listed shares (both UK and non-UK). The performance of the listed markets has a direct impact on the scale of CGT on listed shares.  

Total dividend income was last split out in 2021 and amounted to £61bn. This incorporates both dividends on listed shares as well as dividends from private companies. Overall dividends from UK quoted companies are running at >£90bn.

Figure 2: Value of dividends – recovering post Covid

Source: Computershare

Overall stamp duty amounts to £19bn, but this predominately relates to property. The level of stamp duty on shares amounted to £3.7bn last year, which reduced from £3.9bn the prior year due to lower asset valuations and reduced share trading. Clearly the health and liquidity of the equity market has a direct impact on the sum collected, given that it is based on a 0.5% charge on the purchase value. This tax is only collected on the transfer of shares listed in the UK, so does not apply for many overseas purchases. This is a penalty for investing in UK assets.

We have advocated removing the level of stamp duty on smaller companies (nb AIM is already exempt) to improve liquidity and enhance the level of interest. This would have a very modest impact on the overall tax take. As a guide, given that stamp duty is based on the value of shares traded, then the FTSE 100 contributes 82%, the FTSE 250 17% and the FTSE Smallcap and Fledgling 0.3%. If the FTSE Smallcap and Fledgling were made exempt, it would reduce total tax take by a mere £10m per annum. Removal of stamp duty on the FTSE 250 would reduce tax take by c.£650m. This looks a large number, so maybe a consideration could be to reduce it to a lesser level (say 0.2%). We would expect a compensating increase in liquidity, which combined with other measures to improve the health of equity markets would potentially fully offset the initial reduction in tax.

Note that stamp duty on shares in France only applies for companies with a market capitalisation of over €1bn and is levied at 0.3%. There is an official list of companies for which it applies, which currently numbers 130. This looks a sensible approach, which could be readily adopted in the UK. More generally in Europe, there have been discussions around having a minimum standard rate of 0.1% on companies with a market cap of over €1bn. This report discusses the variances in FTT across Europe. There have been a number of suggestions regarding an FTT in the US, however these views have been countered by a recognition of the impact on the liquidity of markets, distortion investment decisions and an increase in the cost of capital.

Declining pool of UK listed companies

The relentless reduction in the UK small & midcap sector is continuing. Over the past five years there has been a reduction of 23% in listed small & midcap companies, with the combined market cap reducing by c.40%. We show the numbers below, both including and excluding funds. This is important as the growth in funds over the past five years has hidden the underlying decline. The growth in funds has been a healthy trend as it has enabled UK investors to access a broader range of assets (infrastructure, biotech, private equity, song rights etc). However, these businesses make a relatively low contribution to UK growth given a small pool of employees and low contribution to tax revenues. 


Figure 3: Reduction in listed companies

Source:  Peel Hunt estimates

Obviously the number in the FTSE 100 and FTSE 250 do not change, so this also hides the sharp reduction in the FTSE Smallcap and Fledgling indices. There has been a reduction of:

·    69 companies or 15% in the FTSE All-Share.

·    97 companies or 23% in small & midcap (FTSE Midcap, Smallcap, Fledgling & AIM).

·    116 companies or 14% in AIM.

·    214 companies or 16% overall.

·    The market capitalisation of the small & midcap companies has reduced by 40%.

Over this time there have been 115 take-privates, with a total equity value of £94bn leaving the UK listed arena. There are currently a further 23 companies in the process of being acquired with a total equity value of £15bn – all of these are small & midcap companies. The hopper is clearly not being refilled as there has only been one IPO of note this year.

The removal of companies from the UK equity markets has numerous knock-on effects as described above. It also removes the pool of expertise in the respective sectors (technology and healthcare in particular) and further drives companies to seek listings overseas, where they are ‘better understood’ by analysts and investors. Just look at some of the examples of companies that have disappeared - Zoopla, Merlin, Inmarsat, BCA, Cobham, Sophos, Aggreko, John Laing, Clinigen, Sanne, CareTech, Euromoney, HomeServe, Biffa and Dechra. Between them these companies had an equity value of £38bn. Of the 15 companies listed, the majority were bought by overseas private equity funds. 


Ownership of the UK equity market

The following chart shows the split of the UK market by ownership.

Figure 4: Split of UK market by ownership

Source: ONS

Although this data is somewhat dated (as at Dec 2020 and released in March 2022), it will be broadly similar today. This shows that UK investors hold 43.7% of the value of the market, with overseas investors owning 56.3%. Given the overall market value of £2.6tn, that means UK owners hold c.£1.1tn of assets in listed UK equities.

Unsurprisingly there is greater concentration of overseas owners within the FTSE100 given the greater scale, liquidity and index tracking.

Figure 5: Investor share per index (%)

Source: ONS

Although a proportion of the rewards of growth go to overseas investors, there is still a considerable weighting to UK holders. Unsurprisingly this is greater for investors in small & midcap companies than for those in the FTSE 100. There is also a far greater proportion of small & midcap companies held by individuals outside the FTSE 100.

Why this matters

There is currently a circle of negativity whereby the number of listed companies is shrinking, the market capitalisation is shrinking, valuations of UK listed companies are depressed and companies are attractive acquisition targets. This has long-term implications for a number of reasons.

·         Smaller companies drive economic growth and employment.

·         The UK loses its attraction as a listing venue.

·         Certain sectors (eg technology) are being hollowed out.

·         Acquired companies see leadership and growth move to other geographies.

·         The UK’s strength as a financial services provider is reduced.

·         The level of corporation tax is reduced.

·         The benefits of listing (broad ownership, high levels of governance and oversight, permanent capital) are being lost.

·         The cost of capital is higher given the low market valuations.

·         Liquidity across smaller companies reduces, further exacerbating the cycle of negativity.

Negative perceptions of being listed

This is also leading to a general perception that being listed is unattractive, particularly in the UK. This view is increasingly widely held by management of quote companies, as well as those that previously might have considered a listing. There are a number of reasons for this negativity:

·         Increased regulatory burden in time and spend.

·         Valuation not reflecting the long-term potential of the business.

·         Higher cost of capital.

·         Harder to raise equity.

·         Box-ticking mentality amongst shareholders.

·         Restrictions and visibility of executive rewards.

·         Increased cost vs private arena.

·         Low liquidity.

·         Risk of predatory takeover.

Some of these have increased materially in recent years (eg regulation and valuation discount), which has further impacted on sentiment regarding the pros & cons of being listed. It is important to recognise the headwinds that UK equity markets are facing and to assess ways to rebalance the narrative.

It should be seen as aspirational and a privilege to be listed, rather than a burden and constraint. It is incumbent on regulators and the government to address this fundamental problem if we are to maintain a vibrant equity market, which is to the benefit of all stakeholders.


Consistent outflow from UK funds

There has been a consistent reduction in appetite for UK equities over the past 20 years, led by a combination of reduced pension fund involvement and lower appetite from retail investors. There was a brief respite post the sharp falls after the Covid outbreak, but the outflows have been material and consistent over the past two years as shown below.

Figure 6: Material withdrawals from UK equity funds (£bn)

Source: Calastone

Whether this is the cause or effect of the issues in the UK equity market does not really matter, because the reality is that this outflow has a number of negative impacts.

·         Depressed valuations, raising the cost of capital, reducing the desire to list and increasing the attraction of being taken private.

·         Greater appetite to list overseas, given higher valuations.

·         Reduced liquidity, which impacts on appetite from overseas investors.

·         Lower tax take, with reduced CGT receipts and reduction in stamp duty.

·         Lower rewards for executives and employees, given the performance of underlying equities.

·         A negative spiral, whereby the importance of UK equity markets diminishes (particularly in small & midcap).

As discussed earlier, we see this as highly negative for the long-term performance of UK PLC and the overall level of funding for vital public services.


Potential solutions

The good news is that there is growing recognition of the importance of equity markets. We welcome the regulatory changes that are being proposed. However, these are largely addressing the supply side of the equation rather than the demand side. Although the supply side is important, the impact of the changes will be relatively modest without the demand side being addressed. The obvious example is that making it easier to list is great, but will not stimulate more companies to list if valuations are unattractive and there is insufficient fund flow to enable investments to be made.

The key areas of supply side reforms include:

Mansion House Reforms – To enhance the financial services sector, unlock capital for promising industries and strengthen the UK as a listing destination. A key part of the reforms was an agreement to invest 5% of DCB funds into UK private assets (including AIM). We recommend an extension of this agreement to include listed smaller companies as it would provide broader opportunities for investment as well as enhancing support for this crucial segment of the market.

Investment Research Review – To support research on small & midcap companies and enhance access for retail investors. Rachel Kent’s review has called for greater flexibility in the payment for research and a platform for research on small & midcap companies, to improve and increase content and enable availability for retail investors. There were a variety of payment mechanisms suggested for the platform, including by issuers, subsidised by the exchange, supported by the government, funded by financial services companies or through stamp duty rebate.

Funding through stamp duty looks the most sensible in terms of simplicity of collection and availability of funding to enable the platform to have the necessary resources. Successful establishment of a platform could be a game changer in terms of access to information and broadening the appeal of UK small & midcap companies for both retail and overseas investors. Giving retail investors access to investment research should be viewed as part of the levelling the playing field with institutional investors and reducing the reliance on potentially inaccurate and incomplete channels (eg chat rooms).

Listing reformsTo simplify the listing rules, enhance flexibility and improve the ability to make acquisitions. The removal of eligibility requirements could encourage earlier-stage companies to list, and the proposed changes should reduce frictions for companies pursuing strategies such as M&A. Listed companies have been at a strategic disadvantage to private companies during a bidding process for an asset due to the requirement to receive approvals and the burden of the regulatory process.

Prospectus reformsTo improve the efficiency of raising capital. In particular, this could remove or list the cap on retail offerings, which is currently set an arbitrary €8m. 

Secondary Capital Raising Review To enhance the ability of listed companies to raise capital. The proposals could make secondary capital raises more attractive to prospective IPO candidates and enhance the reputation of the London market. The introduction of a mandatory retail offer for companies conducting follow-on share offerings is also a key proposal and would broaden the addressable market for fundraisings and improve access for retail investors.

We addressed these regulatory reviews areas in more detail in our recent note.

In addition, we believe the government should extend the National Security & Investment Act to include IPOs. This would ensure that any company of strategic importance to the UK would have to have a primary listing in the UK. This need not just be security of IP, but also include job creation, tax revenues and location of head office. The UK is good at developing IP and ideas, but very poor at fully commercialising them. This has been due partly to limited access to development finance, which is currently being addressed. However, a key part is the ability to continue funding the growth of the company as it expands. If the government enables greater investment into private companies, then it stands to reason that the companies that access these funds should be listed in the UK to ensure continued benefit to UK Plc and UK investors. A good example of this is the IPO of Arm, where gentle persuasion did not have the required results. Importantly, this need not be an administrative burden given that the framework and resource is already in place under the National Security & Investment Act.

On the demand side, we have proposed a number of areas that would drive fundamental change and reverse the declining pool of companies and assets. These include:

Improve retail access – As discussed in the Kent review.

Stamp dutyRemove stamp duty for transactions in listed small & midcap companies (similar to AIM).

IHT Make investing in small & midcap companies exempt from IHT and held for two years (similar to AIM).

CGTRemove CGT for investing in listed small & midcap companies (similar to AIM). Mandate a holding period (say three years) to encourage long-term investing.

Corporation tax – Introduce graded tax for companies based on certain profit levels, to reduce the negative impact on smaller companies from the recent increase from 19% to 25%. This could be focused on listed companies to reflect the importance of the equity market to wider society.

ISAs Mandate a proportion to be invested in UK listed assets in return for the associated tax benefits. France’s saving scheme for retail investors (known as the PEA) had 6.6m accounts in 2020 with €112bn of assets. The funds need to be invested in European listed shares ensuring a focus on home markets.

ISAsIntroduce a dedicated ISA for investment in small & midcap companies. France has a PEA dedicated to financing small & mid-sized companies with a market cap of less than €1bn at the time of acquisition. The PEA-PME is separate to the PEA and has a maximum deposit of €15,000. It has raised over €700m for investment in small & midcap companies since inception and has a five-year holding period to be tax exempt.

ISAsCombine cash & shares ISA, so that investors have greater ability to adapt their investments according to their requirements, rather than being locked in to a single investment strategy.

SIPPs – Mandate a proportion to be invested in UK-listed assets in return for the associated tax benefits, similar to changes to ISAs.

IHTBroaden the inheritance tax exemption from AIM to fully listed smaller companies, with a similar two-year holding period.

PensionsExpand the Mansion House Compact to incorporate smaller listed companies.

LGPSBroaden the initiative to increase exposure to growth assets by widening the mandate to go to 10% in private equity to include small & midcap listed companies. Also, the requirement should be for these funds to be explicitly targeted at UK investments.

Super pensions Scale matters in pensions, as it gives purchasing power, cost advantages and greater ability to manage risk across a broad portfolio. The benefits can be material to the domestic economy. A good example is the growth of AustralianSuper, the largest pension fund in the region, which outperforms UK pensions and has a higher weighting in listed companies.

PPF & mature schemesCompanies are heavily incentivised to close schemes and remove the future risk from their balance sheets. This is perfectly understandable given the focus on risk & regulation, which has resulted in historic underperformance and regular cash injections. However, there could be changes made to encourage creation of surpluses to the benefit of pensioners and companies and for companies that buy-out pensions to have a greater focus on growth.

New Financial Has written extensively on the potential benefits of changes in the pension system as well as identifying the myriad of reasons for poor past performance. The report can be accessed here.

Sovereign Wealth Fund Perhaps not a priority currently given the state of government finances, but it is never too late to start, as demonstrated by a number of other countries.


Note that when we are discussing small & midcap companies, we are meaning all businesses outside the FTSE 100. Most of these suggestions would have little or no impact on government finances in the short term and would increase finances in the long term due to stronger economic growth. Some countries have chosen an arbitrary limit as to what size of company classifies as a smaller company – we would see a £1bn cut-off as being reasonably sensible.


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