Impact of the Autumn Statement: What does it mean for the UK’s equity capital markets?
In November 2023 the UK chancellor Jeremy Hunt laid out his Autumn Statement – with an emphasis on equity investment and secondary market reforms; and with research rebundling, tax relief and stock exchange regulation firmly on the agenda. What impact will the plans have on the UK’s equity capital market – and how should firms be preparing for potential outcomes?
Key elements from the Chancellor’s speech included a raft of policies to boost the flow of equity capital into UK growth companies, and to combat the exodus of liquidity, reinvigorate the IPO market, restructure pension scheme investment and support the retail market. In addition, the statement contained plans to rebundle research, revamp stock exchange regulation, and support secondary fundraising.
Pension reforms
GBP250 million will be invested under the Long-term Investment for Technology and Science initiative (LIFTS) to encourage pension funds to invest in UK science and technology companies, while a new Growth Fund will be established through the British Business Bank to give pension funds another investment avenue into growth companies. The Mansion House Compact earlier this year also confirmed that two thirds of the UK’s Defined Contribution funds (11 signatories) will allocate at least 5% to unlisted equities by 203 – including AIM and AQUIS Growth Market stocks.
The Autumn Statement also laid out plans to extend the Growth Market Exemption (relief from Stamp Duty and Stamp Duty Reserve Tax) to smaller growth markets, from January 2024.
Stock exchange regulation
The UK’s review of stock exchange regulation is ongoing, and likely to gather pace next year. The issue was mentioned in the King’s Speech and in the Financial Reporting Council’s response, while the FCA is currently consulting on changes to the London Stock Exchange ‘Official List’. Amendments to listing rules are expected the first half of 2024, with the merging of the current Premium and Standard listings. In addition, expected changes to prospectus regulation are also likely to impact smaller markets such as AIM and Aquis Stock Exchange, with a streamlining of the rules that should make it easier for secondary fundraises and retail offerings.
Market concerns
There is no doubt that UK equities have been going through a rough patch, and concerns are rife over the UK’s loss of competitiveness. In a recent webinar by Hogan Lovells on the Autumn Statement James Ashton, CEO of the Quoted Companies Alliance (QCA), raised concerns over the shrinking presence the UK has in the MSCI and other indices.
“Whether it’s Mifid II, whether its geopolitics, or a combination of many things, it has led to a bit of a miasma and a gloom over the UK market. Strong questions are now being asked about lack of visibility, particularly as you get into the smaller segments of the marketplace. This then consequently leads to the de-rating of markets, de-equitisation, a huge increase in public to privates, which then hampers the ability of companies to raise funds in public in public markets, and causes this perennial situation. So there’s a long list of issues that the capital market reforms are seeking to address.”
Claire Suddens-Spiers, global head of equity advisory at Rothschild & Co, agreed. “I think finally there is a recognition that we have lost our way in terms of being competitive. There’s a lot of complacency around the UK market, the London market, being seen as a major financial centre. However, we have lost pace. The reality is that there’s a lot of global markets that have grown up around us. It’s not just the US anymore – there have been fantastic developments both in Asia and in the Middle East, for example. So although London still is one of the most international financial centres, it is no longer needed by some of those global markets in the same way that it once was.
“There is a recognition that we have to become more competitive for homegrown businesses, rather than just seeking to position ourselves as an international financial centre. To me, the raft of capital markets changes that are now being sought are an acknowledgement of that fact – we have lost our position somewhat and lost reasoning as to why we deserve to be an international financial centre and lost the focus in terms of what that does for the domestic economy and domestic companies within it.”
Too many cooks?
There is now a groundswell of activity to try and address these issues, including the plans laid out in the Autumn Statement, which are underpinned by a raft of additional initiatives. These include a major shift now happening in terms of the rules and regulation around markets: such as the Wholesale Market Review, the Edinburgh reforms, the Hill review, the Austin review, and of course Rachel Kent’s recent Investment Research Review. But is it too much?
“There are some conversations happening now about whether we have over-regulated the markets, and whether that has contributed to the lack of competitiveness,” warned Suddens-Spiers. “How do we reduce this gold-plating that has built up over decades?”
Another critical element is the attractiveness of the market, not just in terms of the rules, but in terms of actual capital flows. “The real focus needs to be on how we can get capital back into the markets to improve liquidity to actually fund growth, particularly when we’re talking about domestic businesses,” said Suddens-Spiers. “How do we get that capital flowing back and more importantly, how do we get it flowing back into listed equities?”
One of the major points that has long differentiated the UK market has been its strength in mid cap – it’s not just a large cap market. So steps such as the Edinburgh pensions reforms, the reference in the Autumn Statement in terms of sell-side running, a potential retail share offer – all of these elements are important in terms of getting capital flowing back into the market.
“There’s no silver bullet that is going to magically repair the slide that we’ve seen in the UK market over the last 20 years. But a combination of all of these things that are now happening is finally starting to push us back in the right direction,” said Suddens-Spiers.
Research focus
A crucial element of this is the UK’s plans to reverse the research unbundling enforced back in 2018 – a decision that has caused some soul-searching across the market, and certainly caused some buy-siders some loss of sleep.
Rachel Kent, partner at Hogan Lovells, chaired the UK’s Investment Research Review, which came out in July 2023. “Assuming a world in which the government and regulators are successful in stimulating the demand of the equation (be it from institutional investors, DC schemes, or even retail side), these capital flows are imperative as a backdrop to the Investment Research Review. Nobody had a bad word to say about the value of research – it’s accepted that better research gives rise to better valuations, which leads to improved liquidity, which is more attractive to issuers. That’s the Holy Grail, and that’s why investment research is so important in this context. So what’s the problem? Why don’t we produce more investment research?”
The unbundling regulation that came in with Mifid II might have been well-intentioned around the issues of disclosure and transparency, but it had the unintended consequence of moving the costs of research away from the end investor (who ultimately benefits) and onto the P&L of the buy-side. That had the effect of reducing the research budget, meaning there was much less cash in the system to access the high quality research that’s available.
“What do we what do we do about that?” asked Kent. “We produced two key recommendations. The first was to reconsider the mechanism of charging ad allow people more flexibility in terms of how they pay. The second was that at the moment, there is limited investment in small and mid-cap companies and to focus on solving that problem m we suggested the creation of a research platform. We get in the people who need the research and who need the investment on the one side, and we get all our excellent providers of investment research on the other side, and we inject funding into that to ensure sufficient coverage.”
A positive pipeline
The good news is that there is enormous potential for change, according to Ashton. But the bad news is just how urgently this change is now needed.
“Within the market at the moment there are a huge number of prospering companies with great potential across a whole range of technologies, and our job is to talk about them better,” he said. “We’ve got to lift these off the page. There is this idea that in the public markets there is no technology, no founder-led businesses, no growth – and that’s absolute rubbish. Within our membership I can point to great fintechs in Huddersfield, great tracking technology in mid-Wales, digital media in Glasgow. What all of these companies need is the opportunity to be able to raise capital when needed, to invest, and to recruit. But currently, all those things are very difficult. We don’t want to be the doomsayers but our latest Sentiment Index was pretty gloomy – companies said it has never been harder to raise money in the public markets.
“So we all really need this continued focus on capital reform. There are no silver bullets, it has to be ongoing. But we have lost 100 companies from London markets in the last year. By volume, that’s like the FTSE 100 disappearing. So while we saw lots of good things in the Autumn Statement, we need to see more.”
Steven Fine, CEO of Peel Hunt, also believes that the system has to change. “We’ve been through an era where money has been pretty free for some time. I heard a phrase recently that I thought encapsulates this perfectly: we’ve privatised gains and socialised losses. The public market was there for the ultimate end game, it was the last resort. Now, the chickens are coming home to roost.
“This has been the first budget for some time to support business. There has been a definite shift in emphasis. I also like the fact that our primary regulator has a competitiveness objective, which is also a change. There is no magic wand – we just have to improve the environment for companies to gain access to capital.
Rachel Kent agreed, with the final word. “This needs doing, but it needs doing yesterday.”
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