Having graduated from Cambridge as a historian, Lord Hill will know one of the first rules in checking any document is to evaluate its author. Applying this maxim to the UK Listing Review, we shouldn’t lose sight of the fact that Hill has spent a sizeable portion of his career in lobbying and at the City’s public relations firms.
This isn’t to suggest anything untoward, rather it is human nature to focus on upside for the world you know. If your framing bias is the prospect of a fee bonanza for the services economy, which admittedly needs a big bone after being sidelined in Brexit negotiations last year, what’s not to like about drumming up more business for London?
But the barometer for success of capital markets must be more than what’s good for the City. Issuing shares and bonds should be about financing growth in the real economy – creating jobs, increasing productivity, and making goods that improve people’s lives and can be traded. The eco-system for funding such creation must be open and fair for all those providing capital.
Investors who put their money to work in this great collective enterprise accept the risk some businesses might fail, because the potential rewards for backing winners are attractive. The role of regulation ought not to be shielding investors from risk, but all market participants should be treated justly and protected from miss-selling.
Companies raising finance should also be subject to a reasonable level of disclosure and uphold governance standards in the interests of all stakeholders. Measures discussed in the listing review dilute some requirements and remove others that may not have been practical anyway. As ever, the challenge is not throwing out the baby with the bath water.
Broad benefits targeted by the review are to bring more initial public offerings to London (affording UK investors more choice of companies subject to their regulatory regime and with shares priced in sterling), as well as keeping enterprising British companies in their home market. When businesses list abroad, their centre of gravity shifts – headquarters, technological innovation and jobs eventually move.
Essentially the thrust of the listing review is that there is no point having the best standards of governance if the most exciting companies in the world are raising money elsewhere. Investors will follow the opportunities, so having more of the best in London still offers greater protection.
But what compromises are suggested? Firstly, in recognition of the fact many technology businesses are founder led, proposals include dual class share listings demarcating economic and voting rights. Voting is a cornerstone of stewardship and governance but giving up control of their businesses is a reason many founders prefer to continue raising finance privately.
Second, overhaul of the prospectus regime governing disclosures to investors has many cheerleaders, predictably from brokers like Peel Hunt who worked with the Quoted Companies Alliance to produce a lobbying document on the listing review. There is a widespread view that key information documents, especially related to IPOs, are so unwieldy that they discourage investors from reading them anyway.
Verbose tombs of health warnings might suffer from the law of diminishing returns past a few pages, but reducing their size is a different argument to easing financial disclosures. Facilitating more forward-looking information from growth businesses is not unreasonable, but clear explanation of what underpins assumptions and key risks to fulfilling them is essential.
For premium listings, the review recommends rules on the three-year track record of companies are relaxed. This includes that the stipulation for 75 per cent of an issuers’ business to be covered by financial records should apply only to the most recent financial period. Intuitively, the worry is due diligence may become lax. After all, public investors already have less information than the private financiers the new proposals in part aim to compete with.
Private equity firms usually have boardroom representation which grants them visibility of the revenue lines and cost centres that decide a company’s earnings. Investors via public markets rarely have the same insight, so proposals to widen the looser revenue recognition requirements some scientific companies are bound by to more sectors, especially in technology and life sciences must be greeted with caution.
Crucially, it should be remembered that funding and founder autonomy aren’t the only benefits private owners bring to the party for many companies. Expertise and contacts may also be key reasons that businesses choose to sell stakes to PE firms and work with their General Practitioners, rather than the rules of a public listing. Relaxing the latter may have limited bearing on the decisions of some of the best businesses the UK Listing Review hopes to coax onto public markets.
Other sources of funding aren’t going away – an estimated $1.9tn of dry powder is waiting to be deployed by PE firms alone. There must be a danger that some of the companies tempted public by a lighter touch regulation end up being the ones that PEs are simply not interested in. Any proliferation of trash listings, even before you consider the potential drawbacks of special purpose acquisition companies (Spacs), may create conditions for the sort of crash that could put many new investors off for life.
