Peter Harrison: The City must back Sunak’s vision for the stock market
It's time we steer a different course for London, and a more prosperous path for the UK’s technology industries.
The relationship between the stock market and the economy is fundamental to any nation’s wealth. Without the effective channelling of capital to the best businesses, all suffer.
For decades, London has been a world-leading financial hub, but now its future is less certain. First, consider an example of its success. Exactly 20 years ago, a nascent biotech firm listed on the London Stock Exchange, raising £35 million. It was spun out from Oxford University. The founders, Alan and Susan Kingsman, had earlier secured a cash injection by floating on the Alternative Investment Market (AIM) in 1996.
Two decades later, Oxford BioMedica is helping to produce AZD1222, the first vaccine in the battle against Covid-19. Now a member of the FTSE 250, it is one of dozens of companies thriving in the Oxford-Cambridge-London biotech “Golden Triangle”. Its laboratories and factories, dotted around Oxford, usually focus on developing gene and cell therapies, and when it has needed money to fund its future, London’s markets have served it well.
At the start of the century, London began to challenge the supremacy of New York and Hong Kong. I remember the frenzied activity of 2007, which marked London’s most successful year for floats.
However, there is a danger that its zenith is now behind us. I have become increasingly concerned that without reform, London faces slow decline at a time when Amsterdam and other markets are in the ascendancy.
In contrast to Oxford BioMedica’s story, Immunocore, another home-grown British biotech firm based near Oxford, signalled in January that it would list on Nasdaq, not in London. This is not a new trend. GW Pharmaceuticals moved from AIM to Nasdaq in 2016.
A further stark comparison can be observed with the growth of Spacs, or special-purpose acquisition companies.
Held up as a faster and less volatile route to joining the market, they raise money first, with the intention of buying an operating business later.
Our research shows that between 2003 and 2019, an average of 17 Spacs a year floated in New York. Last year, the number exploded to 248. In 2021, that record has already been broken. Meanwhile, the Spac market on this side of the pond has been stagnant. Nearly £64 billion was raised through Spacs in the US last year, according to data firm Dealogic. In the UK, the figure was just £30 million.
What needs to change? The Lord Hill review offers a way forward. Lord (Jonathan) Hill recommends a loosening of Spac regulations, among a range of other measures.
A much-needed reform to allow companies with dual-class share structures the opportunity of FTSE 100 status has also been suggested. Under current rules, companies with dual voting rights have access to only a “standard” listing as opposed to “premium”, missing out on entry to the FTSE and the benefits it brings: for one, passive funds are forced to buy their shares. Dual-class share structures, permitted in New York and Frankfurt, help owners of newly listed companies to ward off hostile takeovers.
In an age of globalised markets, why should it matter where companies list? The danger is that entrepreneurialism and expertise quietly slip abroad, a process that is already under way.
In contrast, by keeping all parts of the development chain on these shores, we nurture industries that can share knowledge and where the most skilled workers can move with ease between fast-growth companies.
There is also a knock-on effect for industries that have thrived as part of the City’s ecosystem, from legal firms to hotels.
But perhaps the greatest implication is one that should be considered by British pension savers. Each year, they have become ever more exposed to the fortunes of old-economy stocks that dominate the FTSE 100. UK pensions retain a lingering “home bias” and therefore have been weighted toward banks and carbon-reliant sectors, such as oil and mining. This alone should be enough reason for change.
Some of our peers in the fund management industry have questioned whether they can execute their stewardship duties with looser rules. The suggested changes are not radical. They merely keep us in the pack.
For example, Hill has suggested reducing free-float requirements, allowing the minimum proportion of a company’s shares in public hands to be 15% rather than 25%.
The UK’s coalition government mooted this idea nearly a decade ago. The subsequent performance gap tells the story that follows. New York’s S&P 500 returned almost 268% in the ten years to the end of 2020. The FTSE 100 managed just 43%.
While this may be due to a range of reasons, a failure to be the go-to market for technology entrepreneurs has been one of the more significant ones.
As for the loosening of rules on Spacs, this is where good fund management companies should come into their own. Splitting the wheat from the chaff is our raison d’etre. And London, in particular, is a world leader in pricing risk, when given the chance to do so.
It is not all gloom. I take heart from Oxford Nanopore, a biotech company, announcing its intention to float in London. But this shouldn’t be an isolated reason for celebration; it should be commonplace and a natural choice.
We should heed the warning of Jason Kingdon, chief executive of London-listed Blue Prism Group. He suggested that UK shareholders did not have a deep enough knowledge of his company’s sector, robotic process automation. He believes the company would be worth up to eight times more if it were quoted on Nasdaq.
British financial markets, his comments suggest, are stifling growth. Deliveroo’s lacklustre listing has been used to make this point. Individual and institutional investors alike suffered immediate losses. I hope that future float hopefuls do not write off London just because of the failure of one listing where the issues were particular to that company. For our part, it was valuation that persuaded us not to invest.
The bigger picture is that we are at a crossroads. By adopting Hill’s proposals, we steer a different course for London, and a more prosperous path for the UK’s technology industries. This is critical in the post-Brexit world.
Rishi Sunak said the UK was “one of the best places in the world to start, grow and list a business”. Making these changes could, in time, make it the best.
This article first appeared in The Sunday Times on 11 April 2021.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.