Dr Darko Hajdukovic
There has been a great deal of discussion in recent months about how to enable globally consequential companies to start, grow, scale and stay in the UK. The UK is actually in a wonderful position in this regard with world leading universities and more unicorns being created every year than any country outside the US, China and India.
However, our ecosystem has not served companies as well as it could at the scaling stage, with companies often finding it hard to access domestic funding and having to seek overseas investment to fuel that phase of growth.
Scaleups are crucial for economic growth – driving innovation, job creation and productivity.
The 34,000 scaleups in the UK contribute £1.2 trillion to the economy, whilst six million other small and medium sized companies contribute another £1.1 trillion. Put another way, just 0.6% of the SME sector accounts for one third of the UK economy.
A great many of the capital market reforms currently being discussed or enacted will serve to create a level playing field for issuers and investors operating in the UK when compared to Europe and the US. But one reform has the potential to be truly game-changing: the development of an intermittent trading venue regulation for the UK.
What is the problem that an intermittent trading venue is trying to solve?
Today, many companies with global ambition are choosing to either remain private or pursue a public listing later than they would have done historically. Companies choose between public and private markets depending on where they are in their lifecycle, which investors they wish to attract and what their growth plans are. But the choices and options available for private companies are very limited: often restricted to a trade-sale – which could cause the company to be absorbed by a competitor and leave UK shores altogether; a secondary block sale, which can be logistically cumbersome; or an IPO –a valuable option for companies if done at the right time in their evolution.
In any case, the consequences of the current situation are undesirable. It leads to a higher cost of capital for private companies, not enough diversification in their investor base and long and uncertain capital raising cycles and limited access to liquidity. All of which puts constraints on growth.
A major factor behind this is that it is not straightforward for many institutions and sophisticated investors to enter this market – with significant barriers to entry including lack of information, cumbersome processes, months of execution risk, and again, limited liquidity and limited pricing transparency.
So why would a public market operator like the London Stock Exchange be interested in this reform? After all, are we simply not here to attract companies to list on our public markets? No. A forgotten fact, is that our primary purpose, for hundreds of years, has been to be a convenor of capital – bringing together those who have capital with those who need capital to help fund growth and innovation. An intermittent trading venue will help deliver this.
A new venue offering intermittent liquidity would solve a very real problem by bridging the gap between the private and public markets, creating a genuine boost to the scale-up economy in the UK and for any company that wishes to grow here.
Crucially, this market will enable companies to stay private if they want to, while providing structured and efficient liquidity in their existing shares at predetermined, infrequent intervals. Infrequent is the key word: this market will serve companies whose investors neither need, nor have the desire for ongoing liquidity.
The new market will allow management to focus on growing their companies while, every once in a while, providing the opportunity to new and existing shareholders to transact through a controlled and efficient mechanism of a stock exchange auction. For those short periods of time, professional investors would get the information and protections more usually associated with a public market when deciding whether to come in or out of share registers. This would significantly alleviate the constraints on management’s time to produce continual public disclosures.
The benefits of an intermittent trading venue are clear and apply right across the ecosystem. It will mean that investors get more access to liquidity moments; early shareholders and VC and PE funds can find exit opportunities; new institutional investors can gain access to companies they might not be able to otherwise; and, critically, staff can have access to liquidity too. Companies will benefit from an evolution in their share register which aligns with their strategic vision for growth. Everyone will benefit from more efficiency, better information, and greater certainty.
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