When it comes to the next technological revolution that will shape all our lives, the Prime Minister’s ambition for the UK is straightforward: we need to be an “AI maker, not an AI taker”.
Yet, this noble sentiment overlooks a real challenge that threatens to fatally undermine his vision. At the very moment Sir Keir Starmer was posing with industry leaders, including Nvidia’s Jensen Huang, at London Tech Week this month, several of the UK’s most promising tech companies were announcing they were selling up to American buyers.
The unfortunate timing highlights a very British weakness. The UK does not have a problem “making” innovation. The problem is what happens after that. After all, the very term “artificial intelligence” was coined in Britain. Visionaries, such as Alan Turing, were working on the foundations of the field as long ago as the 1950s, and the global race to develop artificial intelligence arguably began with DeepMind, a London-based start-up founded in 2010.
However, DeepMind’s fate was all too familiar: it was acquired by Google for £400 million, a tiny fraction of the trillion-dollar valuations now commanded by the US tech giants it helped inspire.
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If the Prime Minister takes one message from London Tech Week, it should be this: in a global economy increasingly driven by innovation and entrepreneurship, the UK cannot afford to neglect one of its most effective tools for scaling high-potential businesses — the equity capital markets of the City. Right now, UK innovation is at a crossroads. Venture capital funding has dropped 60 per cent from its 2022 peak and the IPO market has stalled.
At the same time the capital’s stock market is haemorrhaging its lifeblood of listings. In the first half of this year alone, 30 London-listed firms have agreed to takeover bids, the vast majority from overseas buyers.
American buyers are not overpaying; rather UK markets are woefully under-pricing their most promising growth businesses
The perpetual flight of promising companies reflects the deep discounts UK public equities trade on relative to US and private market peers. The £1.8 billion takeover bid for UK chipmaker Alphawave — unveiled on the day Starmer was posing up at London Tech Week — came in at a staggering 96 per cent premium to its share price. American buyers are not overpaying; rather UK markets are woefully under-pricing their most promising growth businesses. Meanwhile, domestic investors overlook the value on their doorstep.
The Government must recognise that UK-listed companies contribute to this country’s economic growth.
Those sold to foreign owners often shift operations, talent and tax receipts overseas. If we want to build a more resilient, innovation-led economy, we must stop treating foreign takeovers as the natural exit route for our best and brightest. And there are things the Government can do to slow down the flight.
The City’s Alternative Investment Market (AIM) has long been one of our most effective tools for scaling high-growth companies.
Since its launch in 1995, AIM has raised more than £135 billion and supported thousands of British small and medium-sized enterprises (SMEs). In 2023 alone, it contributed nearly £70 billion to the UK economy, after taking into account supply chain impacts and multiplier effects, and supported more than 700,000 jobs.
It also serves as a bridge between private capital and global scale. UK universities house some of the world’s most impressive intellectual property. Oxford Ionics, a quantum computing spin-out from Oxford University, secured private capital to develop its technology in the UK. However, to scale further, it ultimately sold out to a US firm, IonQ, for £820 million. With a more supportive public market, that story might have had a very different ending.
This dynamic does not have to be terminal. We need the right reforms
This dynamic does not have to be terminal. With the right reforms, we can ensure that more home-grown success stories remain rooted in the UK for longer. Firstly, AIM should be championed as a strategic national asset, beginning with a firm commitment to maintain the tax incentives that have long attracted patient capital and supported sustainable growth. Weakening these incentives now would be counterproductive.
Second, we must redirect more domestic capital into domestic companies. Now only six per cent of UK pension assets are invested in UK equities. But other countries, including Australia and Sweden, have demonstrated that modest allocation targets can reverse chronic capital flight and foster national innovation.
Rachel Reeves should also affirm that the Government’s commitment to mobilising pension capital under the Mansion House Accord extends to companies quoted on AIM as well as private markets. The two go hand-in-hand to create an effective growth company ecosystem in the UK.
Similarly, the decision to scrap the British ISA should be reconsidered. It was a missed chance to channel taxpayer-supported investment into UK-listed firms rather than subsidising speculation in overseas giants.
Third, AIM-focused venture capital trusts (VCTs) currently manage more than £1 billion. Yet outdated restrictions prevent them from providing ongoing support to companies that have received initial tax-subsidised capital by allowing them to buy secondary market AIM shares in those same companies. In addition, loosening constraints around company size, age and capital limits on VCT investments would allow the most promising SMEs to raise more money for longer and scale more effectively.
Fourth, stamp duty payable on main market share purchases should be abolished. That would remove an unnecessary cost and friction to trading domestically listed equities that does not apply to overseas shares, needlessly making our stock market less attractive. Such measures would improve public market liquidity and strengthen UK-listed valuations, lowering the cost of capital for the growth businesses that fuel GDP, tax receipts and employment.
The economic argument is undeniable. Despite pessimism from domestic investors, AIM-quoted businesses are, on average, significantly more productive than the broader UK company base. They pay more tax per employee, generate strong exports and can deliver meaningful returns regardless of policy action. But their chronic undervaluation continues to be exploited by foreign buyers as successive governments look the other way.
A healthy capital market ecosystem is a vital pillar of any credible growth agenda. Reclaiming the UK’s position as a global technology leader starts with recognising the importance of our public markets.
Ken Wotton is managing director of public equity at Gresham House
