We responded to HM Treasury's consultation on financing growth in innovative firms.
We commented that the fact that the number of companies accessing public markets in the UK has declined steadily over the last ten years indicated that a material number of firms in the UK lack the long-term finance that they need to scale up successfully. We noted that this would negatively impact the UK’s productivity in the coming years.
We remarked that the main root cause holding back effective deployment of and demand for patient capital in the UK is the steady decline in the proportion that pension funds account for in London Stock Exchange investments. We noted that new investment techniques and instruments had played a role in shifting investment from innovative, growth companies to low-risk, steady yield investments.
We suggested that the short-term horizons of investors and their clients is a major barrier holding back an effective supply of patient capital as quoted companies were frequently under pressure to achieve growth forecasts and to deliver immediate returns for their investors. This often led to quoted companies not making the strategic investments that are in the long-term interest of both the company and the investors.
To effectively strengthen the provision of patient capital in the UK, we called on the government to:
- Equalise tax treatment for equity investment with debt financing to offer companies a greater incentive to raise finance on public markets and promote long-term economic stability.
- Permit funds to invest in AIM companies that qualify for inheritance tax relief, allowing fund managers to invest in smaller and less costly companies, spreading the allocation of capital wider and thus investors’ investment risk than it is at the moment. This will create increased liquidity and investment in smaller growth companies.
- Broaden the scope of Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) rules to enable growing companies of all ages to raise the finance they need to thrive.
- Relax Company Share Option Plan (CSOP) requirements to incentivise the provision of long-term finance and encourage employee share ownership.
- Revise the prospectus rules as soon as possible after the UK has left the European Union. Making these more compatible with the needs of UK capital markets will enable smaller growth companies to seek funding from public capital markets.
- Explore alternative corporate ownership models and examine how to reconcile investors’ governance concerns with the desire of entrepreneurs to retain control of their company. This could entice entrepreneurs to list their company on a public market and unlock new opportunities for patient capital.
- Require the Financial Conduct Authority (FCA) to establish a proportionate approach for smaller listed companies on UK regulated markets, mirroring its proposals for sovereign owned entities. This will make regulated markets more attractive for smaller companies and therefore widen the investment population for pension funds and others that can only or choose only to invest in listed shares.