This new report sheds light on the concerning decline of smaller listed companies over the past few decades and argues that rebuilding a vibrant market for this sector is crucial to help drive long-term investment and growth in the UK’s capital markets.
Despite their critical role in the UK economy, smaller listed companies have faced a significant decline in recent decades due to a combination of factors, including reduced demand from investors, increased regulatory burdens, and the increased likelihood of falling into a so-called “negative feedback loop”. However, there is potential for a turnaround through targeted reforms focused on tax incentives, increased investment, and a broader revitalisation of UK capital markets.
Key highlights of the report include:
- Decline and fall: over the past 20 years, there has been a 31% fall in the number of smaller listed UK companies, translating into a net loss of nearly 600 companies and compares with an increase of 20% in the number of large listed companies.
- A reversal in fortune: Over 25 years, smaller companies significantly outperformed the wider UK market (with an annualised total return of 7.4% vs 5.4% for the wider market) and generated the same total returns as the S&P 500 (7.5%). But this has reversed over the past decade and smaller UK companies have significantly underperformed (smaller companies including AIM 4.5%, FTSE all share 5.3%, S&P 500 11.9%)
- Smaller companies matter: while they only account for 8% of the UK stock market by value they represent 82% of the number of listed companies; smaller companies have raised nearly £250bn in real terms over the past 20 years from the equity market. And they act as an escalator for the big companies of tomorrow: one third of listed UK companies today with a market value of more than £2bn have been a smaller company at some point in the past 20 years.
- A negative feedback loop: driven by a decline of institutional and retail shareholders, smaller companies are locked in a doom loop of lower demand, lower valuations, and lower returns.
- A rising tide: most of the recommendations in the report are focused on reforming the wider UK market on the basis that a rising tide in investment would lift all boats (such as increasing pension contributions, reforming ISAs, potentially adopting a lower rate of CGT or dividend tax on UK equities (as is the case in Australia and Canada), and updating the UK’s archaic shareholders framework (the government’s Digitisation Taskforce is due to make its final recommendations soon).
- Special measures: specific recommendations to boost smaller companies include: extending the exemption from stamp duty on trading in AIM stocks to the rest of the UK market excluding the FTSE 100; extending the Mansion House compact to encourage pension fund providers to allocate more to smaller companies (AIM stocks are officially ‘unlisted equities’ from a regulatory perspective), a spring clean of governance standards to ensure that smaller companies are being held to high levels of transparency but not necessarily the same standards as much bigger companies; and reviewing the clampdown on liquidity and concentration rules put in place after the Woodford scandal in 2019.
This report has been released by New Financial in collaboration with abrdn, Euroclear, Winterflood Securities and the Quoted Companies Alliance.
