While most of the media coverage of the chancellor of the exchequer’s November autumn statement revolved around tax cuts and the existence—or otherwise—of the headroom necessary to underpin them, lesser noted aspects in the mainstream media were reforms to support UK growth companies.

Some of those reforms will indeed provide a degree of succour to high-growth private companies, but notable by their absence were new proposals to reinvigorate the London Stock Exchange and promote the growth of UK businesses through floating on the exchange.

In a recent piece I co-authored with Brian Cheffins of the European Corporate Governance Institute, we identified various culprits for the precipitous decline in the fortunes of the London Stock Exchange’s equity market. Among them were regulatory hurdles deterring companies from listing or motivating them to de-list, the rise of private capital, a dearth of investment research into high-growth companies, the relative absence of domestic pension funds and insurance companies as investors in the market, and a cultural deficiency that has hampered long-term investment in growth companies and the development of dominant, truly world-beating listed companies.

Private focus

The autumn statement presents very little new fodder to remediate the list of factors that we identified. Instead, the autumn statement broadly focuses on the private company sector. For instance, a swathe of reforms is aimed at boosting venture capital and private equity investment in the UK.

Guidance has been updated to the Local Government Pension Scheme to increase allocations to private equity to 10%, the British Business Bank will establish a growth fund to facilitate pension plan investment in venture capital and a future fund to support R&D-intensive private companies, and the Enterprise Investment Scheme and Venture Capital Trust regimes, much beloved by entrepreneurs and investors in private companies, will be extended to 2035.

Pension plan consolidation will also continue with an aspiration to ensure that most British beneficiaries will be invested in pension plans with assets under management of £30bn or more. The larger scale of pension plans will enable them to diversify their investments and make alternative investments—such as private equity, venture capital and infrastructure—more accessible. Good news perhaps for our start-ups and young growing private companies, but what about the next scale-up stage, when those companies are seeking to grow into the dominant players that have driven the success of the US markets in recent times?

The private and public markets are often viewed as distinct entities and reforms tend to discretely modify the environment for one or the other without treating the two as an interconnected ecosystem for British businesses. Of course, bolstering the UK’s venture capital scene is a boon for early-stage (and, if successful, later-stage) growing private companies, and could fill the funding gap identified for such businesses, but eventually venture capital firms must exit. What happens then? Private equity could step in, more so if the reforms suggested in the autumn statement take hold, but private equity firms themselves must also finally exit, simply delaying the next stage.

Overseas exchanges

Research has shown that British companies are disproportionately the subject of acquisitions by foreign companies. They are not typically listing, or, at least when they do, media reports indicate that overseas exchanges are becoming more attractive due to the perception that better valuations can be obtained abroad. The autumn statement reforms could assist in building up Britain’s innovative businesses, but building them up to simply see them mature overseas, with an inevitable slow shift of operations and jobs away from the UK, will not be the long-term fillip that the country requires.

Is there any red meat in the autumn statement for the listed sector? Well, the chancellor has reiterated support for the stream of regulatory changes that had already been announced, including reforms to the prospectus rules, a Financial Conduct Authority (FCA) consultation on investment research, and the FCA’s proposed combining of the standard and premium tiers of the main market.

Investment research reform could indeed buttress the UK’s public markets, but so far the focus has been on firms already listed, rather than firms seeking to list. IPO valuations of high-growth, including tech, companies will catch up with the US only if there is vibrant investment research into high-growth companies seeking to list. A chicken-and-egg problem exists when there is a lack of such companies on the market already.

The autumn statement also references Solvency II reforms. Judicious Solvency II reforms could entice insurance companies back to the public markets, but the autumn statement clearly indicates that the reforms will likely target encouraging insurance companies to make investments in infrastructure assets, rather than in listed equities.

Moreover, regulatory and governance reform will not move the needle on resuscitating the London Stock Exchange, and cultural change will be required to promote investment in listed growth companies over value companies. To that point, the private company reforms may engender more of a growth culture in the UK, but the lack of public company targeted reforms mean that the benefits will be indirect at best.

Finally, on the demand-side, the autumn statement does nothing to attract pension plans back to UK-listed equities. UK pension plans have largely withdrawn from UK-listed equities, holding only 1.8% of the market as of the end of 2020.

Domestic pension plans are big backers of equities in the US and Australia, and drawing them back to the London Stock Exchange could be a significant boost to the stock market. However, the focus on advancing private equity in the autumn statement could, instead, delay the listing of UK businesses, and even precipitate the de-listing of existing public companies through public-to-private transactions.

Furthermore, large pension funds seeking the best returns from alternative investments will naturally gravitate towards the UK funds of US private equity and venture capital behemoths. When it comes to exits, it is unlikely that those overseas institutions will view the London Stock Exchange as an obvious forum.

The private and public markets are intertwined. A robust domestic public market that provides a viable forum for growth capital and exits can enhance the valuations and vitality of the private market.

A burgeoning private market can, in turn, provide a pipeline of companies ripe for listing, but that supply-side needs to be backed by a demand-side that makes the London Stock Exchange an attractive venue. “Growth” has become the buzzword in UK politics, but we should not forget that growth needs to be tackled holistically. Let’s not forget the London Stock Exchange.

Bobby V Reddy is professor of corporate law and governance and the University of Cambridge