The future of smaller company capital markets in the UK – New Financial report

To the London Stock Exchange, for the launch of New Financial’s report into the state of smaller listed companies in the UK.

A new report launched this morning at the London Stock Exchange examines the decline in smaller listed companies, retreat of retail and institutional shareholders, why we should care about it – and what we can do to address it.

This report argues that rebuilding a vibrant market for smaller listed companies is a vital part of the wider reform of UK capital markets to help drive long-term investment and growth.

It paints a stark picture of the burning platform over the past few decades and how smaller companies have been hit harder than the wider market, highlights the unique role they play as a source of funding for UK plc, and outlines a vision to reverse their decline.

Well done to the New Financial Team for pulling together a deep set of data points which give us the full scale of the challenge. To pull out just one statistic, in seven of the past 10 years, the number of smaller companies delisting has exceeded the number of new issues.

Chatsworth has been working for clients across UK capital markets for two decades – we have thoughts to add to this discussion.

Firstly, we believe it is vital to create and foster a more investment-oriented culture with a more educated and incentivised retail investor base to help drive a resurgence of funding for smaller companies, bolstering the UK’s economy more broadly.

Bluntly, we’re lost our appetite for risk and most people have never considered investing in UK equities or any other equities for that matter and wouldn’t know how to even if they wanted to. This needs remedying.

Issuer engagement with retail investors is broadly speaking, woeful, with complexity, duplication, friction and archaic paper-based processes right down the line.

And we are lagging drastically behind the rest of Europe. Shares’ representation of household assets in Sweden, for example, are nearly four times higher than in the UK (40% compared with only 11%). This is large pool of untapped capital that could hugely benefit individuals, businesses and the broader economy.

So re-engaging UK retail investors is a vital part of the story – but we also need to focus on the whole shareholding infrastructure and ensure the promise of the Edinburgh reforms and digitisation taskforce are implemented.

We must also modernise our financial infrastructure around private companies to embed them in the UK during their growth journey and create a funding escalator to transition them to public markets. That doesn’t have to mean a listing on AIM anymore.

The UK should move to a much more digitised shareholder model, similar to that of Sweden, to make trading more efficient and transparent, increasing levels of trust and engagement in smaller companies from retail investors.

We need the LSE and AIM (which got a slightly unfair kicking from the Tony Blair Institute this week) to succeed. Still, investors and innovative companies won’t wait forever for legacy bourses to get their act together.

There are a number of ambitious trading venues and firms eyeing the opportunity to bring the efficiencies of public markets to private markets.

Chatsworth

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