Reforming the UK’s capital markets - 6 key points - Simon Thorpe

Simon Thorpe former Chair of Cambridge Angels and active angel investor, has shared his thoughts on the recently published Blair Institute report.

Early last week the Blair institute published a comprehensive and well researched report on reforming the UK’s capital markets. You can find their report here.

As an entrepreneur running my own business, a prolific angel investor in UK private companies and an ex UBS research analyst in the public markets, this report struck a chord with me.  

Why?  Because it underlines the importance of equity research, and because all of my successful angel investing exits have been via a trade sale to overseas corporate buyers.

20-30 years ago I would have expected at least some of these companies to float on London’s public markets and yet not one single company of mine has IPO’d. Of my current 35 company portfolio companies an IPO is sadly a distant prospect and a NASDAQ listing is much more likely because of the depth of growth capital and the much greater appetite for risk in the US. 

Unfortunately the declining number of growth companies listing in the UK is also driving a lack of highly experienced Chairs and NEDs with operational experience and ultimately this weakens the UK’s ability to build and grow companies of scale. Radical change is needed to address the UK declining capital market’s position

 For those of you who have not yet had the chance to read the report here are the 6 key points including recommendations.

1. The decline of UK Capital Markets:

• The UK’s public capital markets, including the London Stock Exchange (LSE), are facing significant challenges. The value of the LSE has been growing much slower compared to global peers like the US S&P 500 and the UK has slipped from being the world's largest stock exchange to sixth place.

• Institutional underinvestment, excessive regulatory burdens, and low liquidity are major reasons for the lack of success, particularly in attracting and growing high-tech companies.

2. Challenges for Scale-Ups:

• The report highlights three key challenges:

• Lack of institutional investment in large private and newly public companies with high growth potential.

• Barriers that reduce investment in smaller public firms.

• An unfriendly public listing environment for smaller firms due to low liquidity, limited professional-analyst coverage, and high compliance costs.

3. Loss of Tech Companies to Foreign Competitors:

• Many of the UK’s brightest startups are either relocating or being sold to foreign competitors due to these capital market issues. The report notes that the UK risks losing its ability to become a hub for high-tech companies unless substantial reforms are made.

4. Recommendations for Reform:

• Close AIM and reform LSE: Merge the Alternative Investment Market (AIM) into the LSE Main Market, creating a rapid route to listing for high-growth tech firms with specific tax and regulatory benefits.

• Improve IPO Environment: Revamp the Private Intermittent Securities and Capital Exchange System (PISCES) to support pre-IPO companies and attract institutional investment.

• Expand Venture Capital: The UK government should allocate £1 billion to invest in five growth-focused venture funds to support large-scale investment in pre-IPO companies.

• Cut Regulatory Red Tape: Simplify compliance and governance requirements for asset managers and smaller listed companies to reduce costs and encourage greater investment in high-growth sectors.

• Encourage Analyst Coverage: The government should act as an anchor purchaser to expand equity research coverage of smaller, high-growth companies, particularly in tech sectors.

5. Addressing Institutional Risk-Aversion:

• The UK’s pension and insurance systems are highly risk-averse, resulting in chronic underinvestment. In contrast, the US has driven growth through its pension funds and venture-capital ecosystems, which power the success of tech giants.

6. Lessons from Hong Kong:

• The report draws comparisons with the Hong Kong Stock Exchange, which successfully reformed its listing rules to attract biotech and life sciences companies. It suggests similar targeted reforms to attract innovative companies in the UK.

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