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Written by Sameer Chowdhry
The Decline of the UK’s Capital Markets.
The UK’s capital markets, which facilitate the buying and selling of financial assets, have formed a significant pillar of the nation’s economy. Its decline has been well documented over the past few years, as: huge companies have moved their primary stock listing away from the LSE; there is a long drought in IPO listings; and the domestic pension industry largely avoids investing into UK equities. This article will detail its decline, focusing on why capital markets matter, how they have declined, and the steps the government has taken to address this.
The Role of Capital Markets
The capital markets are part of the broader financial services sector, accounting for 10% of the UK’s economy as they generate £90bn in tax revenue. Consequently, the markets’ decline has caused a domino effect. The legal, investment banking and accounting industries have been affected, alongside the broader economy. Rachel Reeves stressed the importance of capital markets by saying that financial markets are ‘central to the UK economy’ and at the ‘heart of this government’s growth mission’. Capital markets growth creates prosperity for the UK in two key ways: (1) businesses are able to easily raise money to grow and invest, creating wealth and jobs; (2) people have the opportunity to get greater returns on their savings by investing in the wider stock market.
The Decline of Capital Markets
When looking at the decline of the UK’s capital markets, there has been an increasing number of companies delisting from the London Stock Exchange (LSE). Most notably, the British chips designer Arm opted to float on New York’s Nasdaq in 2023, causing a blow to the LSE. Flutter Entertainment, the legal parent of Paddy Power, Betfair and Sky Betting also recently transitioned its primary listing from the LSE to New York.
Typically, companies opt to list in the US due to its larger and deeper capital markets, which offers a stronger investor pool as well as the potential for higher business valuations. Tui, however, Europe’s biggest travel company, abandoned the LSE in favour of having its primary listing in Frankfurt, Germany. Therefore, not only has London possibly lost its appeal compared to New York, but it is beginning to lose its preeminent position as the best place within Europe, emphasising its decline.
Furthermore, domestic pension funds largely choosing to avoid UK equities in favour of those in the US is symptomatic of the wider decline of the UK’s capital markets. Investment managers within the UK only have 4% of their assets in UK equities, decreasing from over 40% approximately 30 years ago. Also, the global average of pension assets held in domestic equities is 10.1%, illustrating how that the UK is lagging behind other nations presently. Considering that the UK pension industry is worth £2 trillion, these figures suggest that investment managers believe they can make greater return on their assets elsewhere or that the UK possess regulatory barriers that makes it more difficult to invest in assets in comparison to other countries.
In addition, there has been a prolonged drought in listings within London. Whilst the tech startup Raspberry Pi floated on the LSE in June this year and Shein have considered launching their IPO in the future, companies have only raised £584.6 million in total this year – this represents a 47% decrease from 2023 according to EY. Naturally, the decline in listings is in part due to unfavourable market conditions, however the figures are broadly in line with the recurring theme that emerges during the past few years – namely London’s excessive regulatory and listing demands as a barrier to entry.
How is the Government Trying to Address these Issues
As a result, the UK government announced the biggest overhaul of listing rules in three decades in an attempt to simplify and revive capital markets. The new rules include: (1) giving company directors more power to make decisions without shareholder votes; (2) allowing companies to issue dual-class shares (where company founders retain control and have stronger voting rights than other shareholders); and (3) replacing the ‘premium’ and ‘standard’ listings with a single category for equities, removing the stricter standards previously required for a premium listing.
Removing the need for shareholder votes on significant transactions affords company boards with the opportunity to act without hesitation when pursuing growth opportunities, reducing the administrative burden of acquiring shareholder approval. Moreover, issuing ‘dual’ shares for an unlimited period is common in the US, therefore bringing the UK into line with the more flexible American market. This change may attract more technology growth companies, that typically have founders that want to retain control, even as the company grows and attracts more investors. Finally, having a single category for equities relaxes the regulatory barriers for companies, making it quicker and therefore easier for companies to list on the LSE – especially for those companies that opted for a ‘standard’ listing due its less stringent requirements.
Conclusion
To conclude, while it is clear that the UK’s capital markets have been on the decline over the last couple of years, the overhaul to the LSE’s listing regime is the first step towards its revival. Only time will tell whether this alone will be enough to boost London back to its once preeminent position.
Sources
https://www.ft.com/content/
https://www.ft.com/content/
https://news.sky.com/story/uk-
https://www.ft.com/content/
https://www.bbc.co.uk/news/
https://www.ft.com/content/
