The City will be listening eagerly to Rachel Reeves in the august surrounds of the Mansion House later this month to hear how the Chancellor intends to make good on the promises of Labour’s Industrial Strategy.
The answers can’t come soon enough. The strategy identified financial services as one of eight key sectors and voiced aspirations to make London “the world’s most innovative full-service financial centre”, but her speech comes just weeks after three of the UK’s brightest tech talents agreed to sell themselves to US buyers in deals worth more than £6 billion.
Those swoops underline a hard truth. While the UK continues to produce world-class businesses, our public markets are failing to hold on to them. The result is an accelerating exodus of listed companies, a slim IPO pipeline, and overseas acquirers circling for bargains. Unless we’ve brave enough to act with much needed policy solutions, nothing will change.
Take the stark latest figures. This year there have been 30 takeover bids for UK-listed companies with market caps over £100 million, totalling £25 billion in value. Two-thirds of offers are coming from international acquirers. An average bid premium of 40% underlines the persistent undervaluation in UK equities.
Equally concerning is the lack of replacements for the likes of Spectris and Alphawave, two of those recent tech targets. At the halfway point of the year, the IPO market for firms over £100 million hasn’t just slowed — it has virtually stopped, with only one this year and only three such listings in all of 2024. This is symptomatic of a deeper issue: the sustained, long-term outflow of capital from UK equities.
There has now been just one month of inflows into UK equity funds in the past 48 months. This contrasts with global and European funds, which have continued to see consistent inflows.
This matters because healthy equity markets underpin economic growth. Public markets fund innovation, create jobs, and give domestic investors - from pension funds to individual savers – welcome returns. Equity remains the most effective form of fundraising for ambitious growth companies, providing permanent, patient capital that supports long-term investment in innovation and infrastructure. They also support a wide ecosystem of professional services and deliver vital tax revenues to fund public services.
But alarmingly, the incentives to invest in UK growth stocks are also being eroded. The government’s changes to inheritance tax rules affecting AIM-listed shares, which have traditionally benefitted from business relief, threaten to further undermine investment in one of the UK’s most important growth company segments. Why encourage people to pull capital out of exactly the type of innovative, high-growth businesses our economy depends on?
Compounding this problem is the exodus of UK pension funds from UK equities. Twenty years ago, pension funds held around 40% of their assets in UK equities; today it’s closer to 4% as funds globalise their portfolios. Just this month we have heard that Scottish Widows are moving their allocation in UK equities to just 3%. Compare that with the likes of AustralianSuper, the country’s biggest fund and a national champion, which has over 20% of assets in Australian shares. The Chancellor’s commitment to creating UK ‘mega funds’ with the capability and risk appetite to back long-term investment in UK growth companies will hopefully make a start in reversing this trend – as well as getting those funds to measure and publish their commitment to UK equities. Given their generous tax allowances, it is incumbent on pension funds to invest over 10% in UK shares. I’d also like to see an expanded role for the British Business Bank - a success story which now provides 20% of UK venture funding. Why not extend its remit to listed businesses, similar to successful counterparts in France?
But we still need to do more, particularly on ISA reform. It is absurd to give out tax breaks to buy shares in overseas companies through Stocks and Shares ISAs. It just makes no sense at all to lower the cost of capital for overseas companies and divert funds that can support UK businesses.
Buy shares in overseas companies by all means, but let’s not give people taxpayer-funded incentives to do so. Similarly, reducing the Cash ISA limit in favour of a British ISA would incentivise UK investment and help reverse a secular trend of declining retail equity participation and weaker individual returns.
It's also time to grasp the nettle on stamp duty — a pernicious tax that which puts up the cost of investing in the UK and should be consigned to history when public finances allow. There is a strong case to broaden the scope of the tax and reduce the rate charged to make the UK more competitive.
This would improve fairness, enhance liquidity and deliver the necessary tax revenue. For example, it’s daft that individual investors pay it but hedge funds don’t.
This is quite a prospectus but encouragingly, there are signs of political will to act. Reeves committed to promoting growth in her first Mansion House speech and has also hinted at ISA reform, saying that “a lot of money is put into cash or bonds when it could be invested in stock markets, and earn a better return for people”. The London Standard’s new campaign to “unleash” the City’s capital markets can help keep up the momentum for change because London’s market decline isn’t inevitable – quite the reverse. The buzz at our recent FTSE 250 conference proved that.
Other markets thrive because they encourage domestic capital, and create tax and regulatory environments that reward long-term investment to support their economies. The UK can do the same. Reeves has already made her mark as the first female Chancellor in 800 years. If she makes the right calls now, she can write herself into the history books as the one who saved the City.
Charles Hall is Head of Research, Peel Hunt
