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London financial markets have been somewhat embattled in recent months with several high-profile businesses choosing to move away or not list at all on the capital’s stock exchange and in response, UK Chancellor Jeremy Hunt has devised a new scheme to boost investment.
In a landmark agreement with the UK’s biggest pension funds, Hunt has secured 5% of their default funds as investment pledges for UK unlisted companies which many people see as a fillip for new start, high growth, and high-tech businesses. So what has led to this decision and is everything as it seems? In our latest thought piece, we look at the issues with London listings and what actually sits behind the new agreement.
The ARM decision
Over the last few months the London financial sector and in particular the FTSE has been the subject of much criticism with many of the complaints surrounding the difficulty in doing business in the UK.
UK chip designer ARM chose in March to move its listing solely to the US where it had a joint listing.
This was a particularly heavy blow for the UK government which had held extensive talks with the company including visits from Rishi Sunak and former PM Boris Johnson, in an attempt to get the company to put its faith in a London listing.
Arm, which is the world’s biggest supplier of chip design elements used in products from smartphones to games consoles will continue to have head offices in Cambridge and did offer the glimpse of hope when it stated that it may possibly return to a co-listing status “in due course”.
Is the Arm choice symptomatic of deeper issues?
Taken in isolation the Arm decision is a difficult one but is certainly not a death blow for the FTSE which remains a vibrant market. It also has to be recognised that the FTSE100 is by no means representative of the entirety of the UK, rather is those large companies at the top of the listed tree.
But critics have pointed out a series of other issues that perhaps hint at deeper problems within the UK business sector. They say that institutional investment managers that
dominate the market simply don’t understand tech businesses and have little or no appreciation for high-growth companies.
This is a challenge as the UK has long tied its colours to the mast of a high-tech future, nevertheless the Chancellors proposal is an encouraging one as it aims to provide much needed capital to innovative sectors.
What pension investment changes are being planned?
One of the key problems facing the UK government is the lacklustre growth seen in the UK economy as it lags behind other G7 stablemates in the COVID recovery phase.
In response, Chancellor Jeremy Hunt has devised a plan to boost high-growth, high-tech investment by corralling some of the biggest pension managers into a new support scheme. These pension funds have agreed to set aside some 5% of their assets, which the government estimates to be somewhere in the region of £50bn.
The plan will see this cash invested in unlisted equities, specifically targeting businesses that have the potential to grow rapidly and eventually join their bigger cousins in listing on the London Stock Exchange.
“We want to be the world’s next Silicon Valley and a science superpower, embracing new technologies like AI in a way that brings together the skills of our financiers, entrepreneurs and scientists to make our country a force for good in the world” said Hunt.
Hunt also posited an “intermittent trading venue” making it possible for public market investors to trade in the shares of unlisted firms.
Laudable aims indeed but there are some caveats here.
The agreement, which is not legally binding, is for the investment managers to utilise the money by 2030, by which time Hunt may well be absent from the government front bench.
Unfortunately, detail was light on the intermittent trading venue and questions have been asked about the regulatory environment and viability of the scheme.
What will the pension changes mean for UK R&D investment?
It’s easy to be dismissive about the missing detail in the proposals and 2030 is still some years away, but the fact that the Government is addressing the issues of institutional financial investment in tech research and development, is most certainly a step in the right direction.
As Haakon Overli, general partner at VC Dawn Capital, told Startups “For too long, British pension holders have been missing out on impressive returns because their pension funds haven’t invested in the tech giants of tomorrow”.
The UK government has been talking about deregulating business since Brexit and should this come to pass the sector could well see something of a gold rush.
At the same time, the Chancellor is also working on proposals to revolutionise the R&D tax credit schemes currently in place although his last attempt at this did require some
‘adjustments’ following significant pushback.
If proposals to also allow the local government pensions schemes to invest in a similar manner come to fruition another £25bn could be added to an already impressive pot.
The Rocking Horse view
Overall, more funding has to be good for innovative companies and we can expect this to start filtering into the funding landscape from 2024 onwards, as Jeremy Hunt starts to look for good news before the UK general election due sometime next year.
As we have opined in previous thought pieces this year, the environment for SME’s accessing funding has definitely got much tougher, thus we applaud any government proposals to improve. Whilst this specific proposition may still be some years out, it is undoubtedly a positive step and would mean significant amounts of funding which would be a game changer for the R&D industry.
In the nearer term to augment your financing, you could be eligible for the Rocking Horse
innovative R&D tax credit or Gov.UK advance funding solution.
Contact us now and we’ll explain how we can give you a working capital boost.