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The UK has had remarkable success in creating and developing technology and growth businesses. It ranks third in the world for the number of start-ups, behind the United States and China, and well ahead of its European competitors. It is also the third largest global destination for venture capital investments.
It retains this strength when companies are a little more advanced: it has the fourth most billion-dollar-plus private companies – “unicorns” – in the world. But when these companies are more mature and listed on major stock exchanges, the country falls woefully behind.
Information technology companies make up just 1 per cent of the FTSE 100; in the S&P 500, it’s 29 percent. Indeed, once UK growth companies reach a certain critical mass, they often choose to IPO abroad.
They can also sell them to a foreign buyer, the latest example being the acquisition of British software company Gresham Technologies by STG Partners. Once public, they can transfer their listing abroad.
This lack of big tech and growth companies has clearly contributed to the FTSE 100’s abysmal long-term performance: although it hit a new high this week, it is only 16 percent above its summit in 1999. But it also hurt the country’s economic growth. . A UK company that becomes listed in Germany will almost inevitably become more German oriented. A Japanese buyer of a British technology company will own that company’s intellectual property. A US acquirer of a UK business will often use the superior products and services of its acquisition to expand into its much larger domestic market.
The British government felt there was a problem. Its default response has been to add to the existing stack of tax incentives, including ISAs, capital allowances, the Business Investment Scheme, patents and venture capital trusts.
While these measures have had some success in some areas, they have clearly failed to achieve the crucial goal of keeping businesses growing in the country.
There is certainly scope for the authorities to make it more difficult for foreign companies to acquire valuable UK assets. The American Committee on Foreign Investment is much more active and interventionist. But the UK must also have a well-functioning capital market that is welcoming to large technology and growth companies, which is not currently the case.
One of the obstacles to listing in London for many tech entrepreneurs is Britain’s ban on dual share classes, which allow founders to retain voting control of the company. Britain’s Mark Zuckerberg of Meta, or Larry Page and Sergey Brin of Alphabet, might never have stayed down if they weren’t sure they could implement their vision.
Although preferential voting rights are rarely present in the broader US market, they are fundamental to the technology. According to a survey by Jay Ritter of the University of Florida, half of all U.S. technology IPOs in 2022 featured dual classes of stock. Some have deemed this provision unfair, but there seems to be no consensus among investors: Alphabet’s voting and non-voting shares trade at virtually the same price.
Then there is the detrimental effect of the 0.5 per cent stamp duty imposed by the UK government on share purchases. This erodes investor returns and thus drives investments to more favorable destinations, which could have a knock-on effect on valuations.
It also hampers liquidity, so vital both to all stock markets and to growth funds, the natural investors in technology stocks. In the United States, transaction costs fell from several percent before commission deregulation during Mayday of 1975, to zero or a tiny percentage. The years after 1975 demonstrated a pronounced inverse correlation between trading costs and foreign exchange activity, and therefore liquidity.
Even if the problems discussed above were resolved, the U.S. stock market still has two insurmountable advantages. Its capitalization is 21 times that of the UK and its valuation is much higher – the Nasdaq Composite’s earnings multiple being almost double that of the FTSE.
But if UK public companies abandoned their outdated system of raising capital through “rights issues”, where existing shareholders are theoretically protected against a reduction in their share of ownership, they would be able to offer new shares on American stock exchanges. to American investors. They could make regular US-style “secondary offerings”, open to a wide range of investors and priced at or near the market price, using their US-listed shares, American Depository Receipts (ADRs). ). They would thus have access to all American investment capital, while a broader American shareholder base and greater American awareness would help to close the valuation gap.
These changes would not be immediately transformative. But if all these elements were implemented together as part of a plan, they would encourage growing companies to list in London, which would gradually help to build trust, not only among their peers but across the broader market, and to establish a long-term trend.
The author is Managing Director of Tail Wind Advisory & Management
