Increased regulatory burdens and listing requirements are denting private companies’ appetite to list in the UK, a new survey has found, as the London market grapples with weakened demand.
Last year marked the London Stock Exchange’s quietest year since 2009, with just 36 companies listing on the exchange, while the number on the alternative AIM exchange slumped to a 15-year low.
Three quarters of small and mid-cap quoted companies and fund managers are concerned that this trend towards de-equitisation — where the amount of equity within a market shrinks — is having a detrimental impact on the UK stock market, according to a survey by broker Peel Hunt and the Quoted Company Alliance (QCA).
Respondents raised concerns that declining numbers of initial public offerings (IPOs), coupled with the large volume of share buy-backs, cash acquisitions and deals taking listed firms private was reducing liquidity in UK capital markets.
“”The sun set on the UK’s public equity markets in 2019. The number of IPOs and companies leaving the markets in 2019 was stark and action is needed from UK policymakers and regulators to reverse the de-equitisation trend in 2020,” said QCA chief executive Tim Ward.
Some 60 per cent of companies surveyed said burdensome listing requirements were helping to shrink capital markets in the UK, while 57 per cent of fund managers blamed the availability of cheap capital from private equity and venture capital for the decline.
Respondents also suggested that the increased regulatory burden of Mifid II legislation, which came into effect in January 2018, on small and mid-cap listed firms was contributing to capital markets’ decline.
Almost 80 per cent of fund managers surveyed thought the legislation has had a negative impact on the liquidity of small and mid-cap stocks, while 82 per cent said that the volume of research being produced on such companies was decreasing as a result of the directive.
Asset managers used to receive research for free as a perk of being a broker’s client, but Mifid II requires managers to either pay brokers for research or pass on the cost to their investors.
While research from the Financial Conduct Authority last year found that the introduction of Mifid II had led asset managers to slash research budgets, there was little change in levels of analyst coverage of smaller companies.
Peel Hunt chief executive Steven Fine said that the “unintended consequences” of the legislation had “knocked investor confidence and made many small to medium sized businesses question their rationale for being listed at all”.
Fine said the “escalating de-equitisation crisis” was “particularly concerning” as Britain prepares to leave the European Union on Friday.
“As we approach Britain’s formal exit from the EU as, without efficient, liquid and well-stocked public markets, the UK’s standing as a global financial centre in a post-Brexit world could well be at risk,” he said.