Britain’s market reboot focuses on start-ups and pensions

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The City is at quite a delicate juncture.

The London stock market has been suffering from an outflow of investment.

Tech start-ups in the UK are being tempted to list on Nasdaq.

That means that the returns that those companies make will go to overseas investors.

At the heart of the problem is the UK’s flawed pension system.

You’re only going to revitalise the UK if we can get pension funds investing again into risk areas of the economy.

The London Stock Exchange is shrinking. That much is clear. Since 1997 the number of companies listed on public exchanges has fallen by almost a half, and the number of new companies coming to market is down by about a third. That means that the UK accounts for a shrinking part of the global pot of global equities.

When I started working in the City nearly a decade ago, we were talking about the FTSE, would it reach 7,000? And here we are nine years later and it’s just breasted 8,000 for the first time. That level of growth is just nowhere near what you’ve seen in the US in that time.

A big problem is that the UK markets are dominated by the so-called old economy sectors, things like mining and oil.

These are not the sorts of investments that get a lot of asset managers out of bed in the morning excited about putting money to work. The new economy, tech, artificial intelligence, all of that stuff, is just not here.

You’ve seen companies such as Flutter, which owns Paddy Power and Betfair. You’ve seen CRH, big FTSE 100 groups, move their primary listing out of the UK to the US.

Even the really big oil companies like Shell, even the fact that it had crossed their mind to maybe leave Europe, maybe leave the UK, this was the wake-up call. I think that the City really needed to start taking this seriously.

London, a typical day on the stock exchange, with members engaged in the busy round of buying and placing shares.

In an ordinary market, what you’d normally have is companies replacing them, and so that ordinary churn is a normal part of a vibrant capital market. I think the fact that IPO activity both in London and globally has been so subdued for the last couple of years obviously places a greater emphasis and focus on those companies that have made those decisions.

There’s lots of initiatives to try and improve the situation, to change rules, to change regulations. There are a lot of people trying to talk up London and say that this is part of a wider global problem: that many markets are suffering.

But there are also specific issues around the structure of the UK pension system and really the entire culture of risk-taking.

The chancellor has put forward a set of what’s been called the Edinburgh reforms. So a whole suite of little proposals that all put together could start to try and turn this tanker around. I think there’s bipartisan support for this. So I think that whoever is the next government, I think this kind of impetus will remain there.

We will have a general election on the 4th of July.

Realistically, irrespective of the outcome of that vote, this reform agenda is likely to continue in broadly the same shape. The Conservative party and the Labour party both see boosting the stock exchange and helping the growth of private companies as a core part of their shared agenda effectively of trying to help the UK economy to be more competitive internationally.

I don’t think it will take very much for people to see the attractiveness of London rekindled, and certainly we’re making sure there are going to be no regulatory barriers to that.

The history of our stockbroking goes back to about 1670 when our foreign trade began to expand.

I think the listing rules in the UK haven’t changed substantially in quite a quite a long time. So I this is an opportunity to put London back into a global context.

There is a bit of negativity and declinism at the moment about London’s position. And I think it is wholly misplaced because it’s based on a misunderstanding of some bigger trends that are happening from which London and the UK are incredibly well-placed to benefit from.

In the UK we feel really squeamish about senior executives at listed companies earning lots of money. They’re fat cats. They’re the bad guys. There’s a very strong argument: this is something that we have to get over.

I have no problem with high levels of executive pay if it is merited by the performance that someone does in growing a company, and in particular, I think for founders of companies. I mean, I haven’t heard anyone complain about Richard Branson being a billionaire, because I think people recognise that the business he set up is extraordinary. And I think people will feel the same about the new generation of tech billionaires that I hope we’ll see in the UK.

My name is Matthew Scullion. I’m the CEO and co-founder of Matillion. We’re about 450 people. We were founded in 2011 and we sell our software all over the world. We wanted to be at the intersection of two mega trends, cloud and data. Around 2014 we developed some technology for our own use actually, and once we got it finished it worked so well we could feel that sucking sound of need from the market. And consequently we needed to grow our business quickly. That’s why we’ve raised $300mn. million.

So the UK is now the third trillion dollar tech ecosystem in the world.

The UK has a phenomenal position. It’s got a lot of the ingredients to really drive a huge amount of economic growth in the UK.

If you look at the last decade, more unicorns in this country than anywhere other than the US and China. I think that’s a pretty good record and a good base for us to start from. Outside the US, we have the largest financial services ecosystem, which means that we are getting the innovation that’s leading to the tech start-ups and the financing. That means that it really is credible to want to be the world’s next, really giant tech hub.

Could you really recreate Silicon Valley in the UK? I mean, dream big, sure. But there’s an awfully long way to go before we get there.

I’m Avion Gray, CEO and co-founder of Belong. Belong is the first platform in the world to offer a mortgage on stocks. We recently closed our pre-seed round and that gave us the capital that we needed to hire the team and build the business and also launch our private beta and get the product and the platform into the hands of real customers. The VC investors were largely UK based and our angel investors came from all over the world.

The UK has a thriving start-up scene, particularly in sectors like biosciences and fintech. There are some great spin-outs coming from Oxford and Cambridge universities.

The experience of starting a business has been a positive one. Firstly, we have been very impressed by the pool of talent that we’ve been able to tap into. There’s also a very impressive sort of cottage industry of tech providers that sort of surround fintech businesses like Belong.

At the start-up and scale-up phase a lot of the government schemes have been fantastically successful and you can see that in the number of unicorns that the UK is creating. Equally, at the large cap end of the scale, if you look at the FTSE 100, you’ve got plentiful capital. A lot of the focus at the moment is going on to that mid stage, that growth stage where companies are often looking to raise tens of millions of pounds.

There is a concern, including at the UK’s economic development bank and elsewhere, that basically the UK is in danger of becoming an incubator economy.

In general, your narrative on how you’re talking about that to me sounds absolutely bang on. Of that money we’ve raised, only $mn came from the UK. All the rest came from Silicon Valley. Once you’ve taken foreign money it’s likely that all the money after that will also come from that geography. And by the time you come to a liquidity event, your cap table will mostly be foreign investment and, as importantly, your board will mostly be representatives of that foreign investment, making it more likely that the company ultimately trends towards becoming a company headquartered outside of the UK or bought by an American company or whatever.

In the past decade, more than 5,000 UK start-ups have been bought by corporate buyers, many of them again outside the UK.

If the UK is going to drive economic growth it needs to be able to finance and keep those companies into the long term and that means being able to take them all the way from start-ups, all the way through scaling, all the way to being worth hundreds of billions of pounds – global companies, but doing it from the UK.

The typical playbook for investments with UK private investors is to invest in companies where they know that they can increase the value of those companies and they work to increase the value and minimise the risk of losing out. I like to describe it as 3X and don’t lose your shirt. Unfortunately, what you will never get is Apple or Google or Netflix.

I’d like to see a British Alphabet. I’d like to see a British Microsoft. It might not be for a decade, but I’d like to see a homegrown company with, you know, a trillion dollar cap.

The entire FTSE 100 is worth less than Apple. And he wants to create something of a similar scale in the UK within a decade. If he succeeds that would absolutely dwarf what is already on the FTSE. The UK stock market would have to be on a totally different trajectory in another world to what it is now for that to be the case within 10 years.

It must be the American way of doing things that makes you the luckiest guy in the world.

The US understood that low interest rates created a perfect environment for getting small companies off the ground and making them enormous and making them incredibly successful, fuelled by cheap debt. So can the UK recreate that trick in an environment where interest rates in a lot of major economies are standing at about 5 per cent? It’s a really big ask. I wouldn’t say that it’s impossible. I’m not pessimistic about this necessarily, but it’s a really, really tough task.

The Capital Markets Industry Task Force was established for a time limited period to try to bring together people from different parts of the ecosystem, but particularly bring together the people who have the capital with the people who need the capital.

If you look at how CMIT is composed, it’s not thousands of people. It’s a small number of people, each one of whom is meant to represent parts of the economic flywheel here in the UK. The first time I walked into the room it was quite intimidating. Most of the other people were sirs or dames. They’re running gigantic corporations. But they’re also representative of the public market side of the equation, the companies that have already made it big enough. To answer the question of how we make more of those.

you need to talk to the proto-public companies, which is what I represent. So yeah, sometimes I feel like the leather jacket versus the pinstripe suits. But if we want to crack this code we don’t just need to look at what we do in the City. We need to look at what we do in the supply chain of private company business building. There’s no point having the world’s best public markets if there’s no companies to list on it. And that’s the part of CMIT I get passionate about.

And suddenly you have bigwigs from across the City, some kind of very influential people that are scurrying around behind the scenes, pulling every lever they can think of, pulling every string they can see, to do all of the many hundreds of little tiny things that we need to do that will add up to a whole of possibly turning this around.

So the next logical question you have to ask is what do we need to do to really fire up our financial services sector, but also why our pension funds invest so little in the UK, where in other big markets you could count on a big amount of domestic pension fund investment to support any IPO.

One of the things that the chancellor, Jeremy Hunt, has been talking about recently in his latest budget is saying that he wants UK pension systems to just explain how much of their portfolios is held in UK equities. To my mind this is the thin end of the wedge. I think pension systems are going to start coming under a lot more pressure to put more money to work in UK equity markets and UK stocks.

The issue with that is when you talk to the people who manage pension funds for a living, they don’t want to be told what to buy by Jeremy Hunt or Rachel Reeves or anybody else. They want to do what is right. They want to get the best returns they can. We’re at a bit of a kind of, you know, slightly at loggerheads here.

So we’re sitting here in the storage centre for the national Science Museum, and we are surrounded by British innovation, stuff that’s gone back over a couple of hundred years of proper risk-taking. And the key to my mind that we face is: are we seeing the risk-taking today being funded in the UK to allow this to perpetuate into the future?

So Schroders started as largely a public markets business, running listed equities around the world for our clients. I first joined Schroders in 1988. 75 per cent of our assets were invested in UK equities. Today that number is less than 2 per cent.

The UK has got the second largest pool of pension fund assets in the world, but it’s not structured in a way that it can be easily mobilised. You’ve got three different pools of capital. You’ve got the old style defined benefit pension schemes. Then there’s the new style defined contribution schemes, and then there’s the pools of insurance capital.

The major challenge the UK faces is the two biggest pots of capital with insurance companies and with defined benefit pension funds do not take risk.

And this lack of risk-taking taking in our pension funds shows up in their long-term returns. So the UK is towards the bottom of the pack in a ranking compiled by the OECD.

Large parts of the UK pension system are absolutely dominated by bonds. They buy bonds. They love bonds. Bonds suit their needs. Bonds suit their regulatory framework. They suit making sure that they’re meeting the requirements of retirees when their time comes. But they’ve lost that equity culture along the way, and they’ve lost this willingness to put money to work in riskier ventures, in younger companies. And that’s a really difficult thing to fix.

To understand the root cause of all of this you have to go back to the early 90s and the death of Robert Maxwell. So after he died and his publishing empire collapsed it turned out he’d been pillaging the pension fund to prop up some of his companies.

And regulation responded to that by reducing the amount of risk that pension funds could take with their assets, pushing them to invest in bonds in particular, which we’ve seen and are generally seen as lower risk. But that had the effect of pushing money out of equities.

Where pension funds kept equities they tended to move away from UK equities to global equities, which was really just them saying that they wanted to invest in US growth companies.

People from all walks of life, workers, farmers, housewives, all of us send our daughters to work in our business system, in the hope of earning dividends or interest on our investments.

That is a huge contrast to the natural domestic bias that nearly every other country will have, which is somewhere perhaps 20, 25 per cent, depending on the country. And yet we’ve got some of the best science and technology businesses in the world.

What we are doing is absolutely in the interests of pension fund holders, of people who are going to be needing to draw down a pension at the end of their lives.

It just instinctively feels ridiculous that the UK has the only big pension system in the world that is underweight its own home market. This doesn’t happen anywhere else. It’s only the Brits could do this. But this just feels like something that can and should be tweaked so that we can start to turn it around.

So there are several pension reforms that the government is looking at. One is channelling more money into private assets. Another is consolidating smaller pension pots into one larger one. And there’s also a focus on trying to think of returns, net of fees, rather than just the headline charges.

My name is Nick Jansa and I’m responsible for Ontario Teachers’ Pension Plan in Europe. Ultimately, our fiduciary duty is to deliver returns to our members, and having the choice as to where to invest those we believe is the best path to success.

So Ontario Teachers’ Pension Fund is one of the pioneers of modern pension fund management. It’s about twice the size of its nearest counterpart in the UK and its returns are enviable.

We need to consolidate our pension fund industry. It’s far too big. We need to make sure that the regulatory structure rewards people who invest for long term returns.

Financial services is an area where we believe there’s good growth within the global economy. So 7iM is a vertically integrated UK wealth management company. We had been tracking and monitoring it for about three years and when the company came up for sale we were able to move very quickly and directly because we were an active investor. Within the UK specifically it could be anything from helping start-up ventures all the way through to companies that are growing and trying to help and offer services, something like Busy Bees, for example, in terms of the child care sector, through to infrastructure at the other end, which could be something like our investment in the Scottish and Southern transmission network.

I think there’s something like 62mn individual pension pots in the UK which have never been aggregated. Overseas, the Australians, the Canadians have done a great job of making those pools of capital scalable.

I don’t think we have the same savings and investment culture that you do in the US where everyone has their 401(k). I think we could do a lot more around financial literacy.

The amount of money which is flowing into people’s savings is nothing like sufficient to provide for them in retirement. But even when it gets into their pension pots it’s then directed to low returning assets that are low risk. So at every stage we’ve got things that are aiming off and producing less return.

And one thing that always strikes me is that in the pandemic, in lockdowns, Americans got cheques in the post, right? You know, Uncle Sam sent them some money because they couldn’t go to work. And what did Americans do with this money? A lot of them punted on stocks.

Now, in a million years, if you sent a check for £1,000 to the average Brit, there is no way on God’s green Earth they would start punting around in the stock market with that money. We just think differently. We have a different sort of culture around money and that is a much more difficult thing to fix.

There’s a tremendous urgency here, and this is not about the City of London. It’s not about bankers in suits. It’s about the prosperity of the entire country.