UK investors and companies call for markets reform

Mid and small-cap companies should be exempt from “overly restrictive” Mifid II research rules, say most of the UK investors and companies surveyed in a report by the Quoted Companies Alliance and broker Peel Hunt.

As the government and Financial Conduct Authority consider their responses to a review by Lord Hill into the UK’s listing regime published last week, the report sets out a list of demands from investors and executives about how regulators and policymakers can grow equity markets.

The equity markets have helped support listed companies over the past year through both emergency capital raising for those suffering in the economic lockdown as well as those seeking funds to grow, having prospered in the pandemic.

Investors injected £45.9bn of capital into UK-listed companies across 333 fundraisings of more than £5m in value since the first lockdown began in March 2020, according to the report.

But it found that investor and corporate optimism for the future remained “worryingly low”, with only a fifth of investors and 5 per cent of companies saying the number of listed companies will increase in 2021. 

The Lord Hill review, carried out by former EU financial services commissioner Lord Jonathan Hill, has highlighted a number of areas of reform to attract more companies to the listed market, such as dual-class shares for the premium segment and changes to the prospectus regime.

Some investors have since pushed back against the proposed overhaul, saying changes aimed at luring technology businesses and special purpose acquisition companies risk “watering down” investor protections.

Steven Fine, chief executive of Peel Hunt, said IPOs were returning — but so were take-privates of listed companies. “We need to make public markets work,” he added.

More than half of companies in the QCA and Peel Hunt survey said the UK’s “burdensome listing requirements and excessive regulatory scrutiny” were the main causes of shrinking markets.

Cheaper capital from venture capital and private equity, and the increased appeal of debt financing in the low interest rate environment, also contributed to keeping companies from listing.

Two-thirds of investors called on policymakers to improve tax incentives for pension funds and insurance companies to invest in small and mid-cap companies.

Investors complained that under Mifid II rules — which require asset managers to explicitly pay for research — there was too little independent coverage on companies.

The survey comprised 141 small and mid-cap UK quoted companies, and 103 UK-based fund managers.

Half of corporates surveyed said the costs of being on the public markets should become tax deductible — and urged policymakers to provide further incentives to increase private investors on the share register. According to analysis from Peel Hunt, just 96 of the 333 equity raises and 10 of the 38 IPOs in 2020 had a retail investor offering.

Tim Ward, chief executive of the QCA, an independent trade organisation that lobbies on behalf of smaller listed companies, said the story of the past 20 years had been about the decline of the UK’s public equity markets.

“In particular, a consistent shrinking of the number of small and mid-sized companies using them, preferring instead to opt for low cost debt or private equity,” he said. 

The Lord Hill review, he added, should form “part of a well-co-ordinated approach from the government that will lead to an expanding small and mid-cap ecosystem in the UK”.