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Examination of witness
Marcus Stuttard.
Q256 The Chair: Welcome to this afternoon’s session of the Science and Technology Committee. We are very pleased to have as our witness Marcus Stuttard, head of AIM and UK primary markets at the London Stock Exchange Group. As you know, our inquiry is around the ability of promising science and technology companies in the UK to access finance and how they should scale up in the UK.
We see many promising early-stage companies being acquired or floating overseas. Given that you have been head of AIM for quite a long time, you have, of course, witnessed this firsthand, so perhaps you could set out for us your perspective on this problem. How serious is it? Why is it happening? What are the UK-specific and global factors? What role does or should AIM play in helping to address this? By way of introduction, when you introduce yourself, perhaps you could address those questions, and then we will go on with a number of others.
Marcus Stuttard: Yes, certainly. Good afternoon, and thank you for the opportunity to be here. As you have highlighted, I have been head of AIM since 2009, and I was with the London Stock Exchange for quite a significant period before that. I have a UK team and, in a way, we are in the very privileged position that we get to meet a very significant number of companies that are admitted to both AIM and the main market, but also, importantly, private businesses. We will often build long-term relationships with those private businesses many years ahead of them potentially doing an IPO.
I have firsthand experience of the fantastic levels of innovation that we have in the UK, which is not just within the M25, but across the UK. I am sure that you will be aware of many of the statistics, but we have four of the top 10 universities in the world, and over 160 visible so-called unicorns. There are lots of other key indicators too, with over 40,000 visible scale-ups in the UK, so I would just reiterate, first of all, that we do have a significant opportunity here.
There are, clearly, global factors at play, as well as some UK structural issues. Since 2021, we have seen a much lower level of investment in early-stage businesses, in both public and private markets globally. In the UK, that has been manifested in a number of ways.
You mentioned the role of AIM. What we are trying to do at the London Stock Exchange is to build a joined-up funding continuum, or escalated ladder, however you want to describe it, but I will probably refer to a funding continuum. We need to make sure that companies from the earlier stages get funding, and a significantly higher level of funding from domestic investors than they currently receive. Time and time again, we see that companies that receive funding from international investors, whether that is US VC or Asian family offices, at B and C, so the early stages, tend to gravitate towards that source of finance over time, and then we lose some of the benefits for the UK economy.
That is particularly ironic, given that, in the UK, we have some very comprehensive and compelling incentives, whether that is the role of organisations such as Innovate UK and the British Business Bank, or some of the tax incentives such as EIS and VCTs. In a way, the UK taxpayer is doing a lot of the hard work at the early stages to de-risk some of these companies for international markets to benefit.
From an AIM perspective, there have been some headwinds that I will come on to talk about, but, before I do that, I will just reiterate the important role that AIM plays. In many ways, for over 30 years, it has played a role as a crossover market between private markets and private funding, and the main market. Some research that we commissioned last year highlighted that just the UK companies on AIM make a £68 billion contribution to UK GDP, and create over 778,000 jobs when you include supply chain effects. Those UK companies alone on AIM make a £5.4 billion contribution to tax, so AIM does play an important role.
Historically, it has been unique in terms of global growth markets, in that it has a very diverse range of companies and investors, from £10 million up to low billions of pounds. We have been suffering some headwinds, though. We have had a period of over 40 months of net outflows from UK-mandated funds, which has disproportionately impacted smaller companies. We have seen the level of capital, of IPOs, so new companies coming to the market, and of further issuance drop quite significantly over recent years.
Unfortunately, there has also been quite a lot of uncertainty created in the run-up to and since the Budget last year. There are a number of fiscal incentives that apply to private companies, and to companies that are admitted to growth markets, of which AIM is the largest. One of those incentives is business relief on inheritance tax, which has been in place for AIM since it was launched in 1995, and so there has always been a lot of certainty around that relief.
In the run-up to the Budget, there was a lot of uncertainty about changes that might occur, which led to an underperformance of AIM and AIM companies. On the afternoon of the Budget, we thought that, with the Chancellor announcing that there would be a reduction but a continuation of business relief, that uncertainty would be behind us.
Unfortunately, it is not, and, because there has been one change, a lot of fund managers and people in the market think that there might be a complete abolition of that relief, which has led to an increase in the number of people withdrawing capital from smaller companies quoted on AIM. This has resulted in a number of IFAs recommending that people hold private assets rather than AIM-quoted assets, and in a number of transfers from AIM to the main market. There is a mixture of both global cyclical headwinds and some quite specific UK structural headwinds.
The Chair: Thank you for that introduction. As I said, we have quite a lot of questions for you. The first comes from Baroness Willis.
Q257 Baroness Willis of Summertown: You have already answered some of this in your introduction, but I am still going to try to understand a bit more. We had a UK biotech company here to give evidence a couple of weeks ago, and it said, “We went to NASDAQ because that is where the capital in our sector aggregates”. Maybe you could help us understand a bit better why those sorts of companies would now choose to list in the UK.
Marcus Stuttard: Generally, companies choose to list for a variety of reasons, including access to capital at IPO and access to long-term, ongoing capital. One of AIM’s big strengths has been that provision of long-term capital. About 80% of the £137 billion that has been raised since launch has been raised by companies on the market doing follow-on capital raisings. For sectors such as life sciences, that ongoing access to capital is absolutely vital. Companies also generally benefit from higher credibility and visibility as a result of being public, and AIM being a London Stock Exchange market really provides that credibility.
The broader point about UK versus US capital markets, particularly for life sciences businesses, is that the nature of that sector is that some companies will do exceedingly well; a lot will not; and there will be a raft in the middle that deliver an average performance. For that kind of sector, you really need a portfolio approach, so you need a broad spread of companies, and there is that broad spread for life sciences companies on NASDAQ.
I would say, however, that, while the US capital markets, both for life sciences and generally, are very broad, they are, in essence, domestic, and so non-US companies tend to underperform. If we take the 20 UK companies that have listed on either the New York Stock Exchange or NASDAQ over the last decade and raised over £100 million—so companies of some consequence—only three are above their IPO price; 10 have delisted; and the remaining seven are 75% below their IPO price.
Baroness Willis of Summertown: Is this on NASDAQ?
Marcus Stuttard: Yes, on NASDAQ and the New York Stock Exchange. If we look specifically at UK life sciences businesses, 15 have listed on the US capital market since 2015. Only one of those is above its IPO price; seven are delisted; and the average performance of the remainder is about minus 80%.
Baroness Willis of Summertown: I do not know why this is not better known, in some ways.
Baroness Neville-Jones: Why do they keep on doing it, then?
Marcus Stuttard: The point there is that our domestic capital markets and our domestic investor base should be supporting our domestic businesses from a much earlier stage, pre IPO, because that will give those companies the best chance of continuing to scale and having long-term access to capital. AIM has provided access to capital for life sciences businesses throughout its history.
Baroness Willis of Summertown: Just for my own clarification, when you say “long term”, are you talking 10 years, 15 years or what?
Marcus Stuttard: It is very company-specific, but we quite often hear and see stories of companies that have been on AIM for 10 or 15 years doing repeat rounds of finance. In particular, they are institutional investors taking a very long-term approach.
Baroness Willis of Summertown: If I can just ask a follow-on question from that—I know that other people are going to be asking about the appetite for risk—when you are in discussion with companies, what do they list as the barriers in the UK? What do they perceive as being the biggest problems?
Marcus Stuttard: There is a perception that some international markets are deeper. I have highlighted the reality of the data. A lot of science and technology companies end up raising international capital from a very early stage in their life cycle and, therefore, quite often feel that they have greater support from international investors, who will just naturally know what the route either to a trade sale to a US corporate, in the case of a US investor, or to the US capital markets might look like.
Because we do not have as much pension fund capital invested in equities in the UK as we did two decades ago, that has resulted in investors taking more of a generalist approach and not having, with some obvious exceptions, the same level of technical expertise. We hear from founders that, when they talk to international investors, they sometimes get very specific questions about very detailed aspects of their business and their business model, whereas in the UK they sometimes get more general questions.
Q258 Baroness Neville-Jones: Given what you just cited as being the record of companies that go to IPO on NASDAQ and do not retain their IPO price, why do they go on doing it?
Marcus Stuttard: Some of this is cyclical, and some is a lack of awareness. You will find that a US-mandated institution that can primarily invest in US domestic stocks may well invest in an international company, particularly when the markets are buoyant. The reality is that, whenever there is any market volatility, the first stocks that it is likely to sell will be its international holdings, so you get greater volatility and less of a long-term approach. That becomes more apparent in tougher market conditions.
You heard me speak about the data. We have done the research and are actively making sure that, when companies make a decision, they are doing it on the back of the best data available.
Baroness Neville-Jones: I can see that they may not realise until they have been on the market for a bit and the IPO value has not been retained, so there must be a story that you can tell about the market in the UK. Is it because they cannot raise the money here, so they go to the US, even if there is this penalty later on with the IPO value? What is the issue? Why is the UK not more attractive?
Marcus Stuttard: There are two key issues. One is that a lot of these companies raise international capital many years prior to an IPO and, therefore, will have significant investors on their shareholder register who will more clearly understand, and have experience of investing in, their home market. Those will be US companies in the case of a US investor. They will portray that US domestic experience, which may well be different for an international company. Companies will often then be persuaded by their investors.
What we absolutely need to do—and we will probably keep coming back to this theme—is to make sure that our own domestic investors are investing in these companies from an earlier stage. We have the flow of companies, one of the deepest pools of capital in the world, and some of the biggest pension funds, but the two are not matching. That is what we need to resolve.
Baroness Neville-Jones: You then come back to the problem of the well-informed investor.
Marcus Stuttard: Yes, and not just well informed, but we need investors that are allocating more capital to equities. You may know the data, but, two decades ago, UK pension funds were allocating over 50% of their funds to equities. That is now down to below 4%, so we need to increase the flow of capital from both institutions and individual investors.
Baroness Neville-Jones: So it is an issue of capital volume as well as information.
Q259 Lord Stern of Brentford: I am sorry that I cannot be with you. I wanted to ask a question in a similar spirit to the ones that you have been responding to. You will have to excuse me, because I will sneeze occasionally. I am in the countryside, where the pollen is a bit intense, but I am fine.
I want to step back and ask, from a slightly bigger-picture perspective, whether you are looking into an area, as we all are, where the supply side appetite, and the prospects for it, may not be so strong. You described a reduction in equity holdings, and we have seen developments where people are going for passive investment, just going into the big indices and perhaps diversifying that globally. It is a different picture and approach to investment from the one that we are discussing here. At the other end, you have seen the growth of private equity, which does not go for a listing, at least not for a while, and is very specific in its activity and knowledge.
We are looking, somehow, at a middle that might not be so strong. It may be a systemic problem that we are dealing with. Mansion House questions will be coming, but pushing the supply side of capital in a direction that it is not keen to go in may be a problem. I wonder whether you could react to that bigger-picture story of what might be going on here.
Marcus Stuttard: There are a couple of things going on. First of all, we have been through a period where funds have been regulated primarily on the basis of cost and providing products to end investors at the lowest cost. The FCA has now moved to more of a value-for-money framework. That is very significant, because, if you are looking to invest purely on the basis of cost, that will have an inherent bias towards low-cost, global, passive products. That is one of the reasons why the UK capital market sits at a 4% weighting in the global indices. That completely misses the opportunity that we have in the UK.
The Capital Markets Industry Taskforce commissioned some research about 18 months ago to look at the weighting of pension funds in major economies. That research found that UK pension funds were 40% underweight based on the size of the UK equity market, whereas Canada is over 700% overweight, France 889%, Italy 991%, and Australia 2,737%. While de-equitisation has been a global trend, UK pension funds have gone a lot further and a lot faster than has been the case globally.
You mentioned the dynamic of public versus private markets. People sometimes position that as a very binary and/or, but I see a symbiotic relationship between private equity and the public markets, because the public markets need the private equity industry for exits, and listed companies are often trade buyers and a source of exit for private equity.
Equally, private equity will take public companies private and will often use the public markets for a benchmark set of valuations. Private equity needs the public markets to be functioning properly, because the more exit opportunities they have, the more likely they will invest in the first place.
Lord Stern of Brentford: I absolutely take the point that, if you are in private equity, you have to get out, and going into the markets is a key way of doing that. When John Kingman was with us and was talking about trying to push people in a certain direction—the direction that we are being enthusiastic about and all want to see—he said that we still have to get the pension funds to choose to do that, implying that it is potentially a bit more than just a narrow form of cost-related regulation. How far do you think the appetite will be there? More constructively, how can we encourage it?
Marcus Stuttard: For me, the deeply ironic thing is that international investors are seeing the opportunity in the UK to an extent that our domestic investors are not, and so there is an education point here. The Government’s move towards consolidating local government pension schemes is helpful, because, when you have larger pension funds with economies of scale and the ability to resource broader research teams, for example, they can do the research, invest and do the due diligence on individual companies, rather than just opting for low-cost, passive schemes.
The opportunity clearly exists; otherwise, international investors, including the Canadian teachers’ pension fund and others, would not be investing in our companies. It is not that we have a problem with innovation or the quality of our businesses. It is just that our institutions have become unused to investing in these businesses and, therefore, I dare say, in some cases, do not have quite the same skill set as some of their international peers.
Lord Stern of Brentford: The worry, though, is whether saying, “Wake up; smell the coffee; get educated” is really going to persuade them. We have to be a bit more specific about how that interaction takes place, because they are not stupid, are they?
Marcus Stuttard: That is right. The thing that we should also bear in mind is pension holders themselves, not just the funds. It would surprise a lot of individuals just how little of their pension funds are invested in the UK economy. New Financial did a piece of research recently, which found that, on average, of the savers they interviewed, people thought that 40% of their pension fund would be invested in the UK, rather than the 4% that actually is. If we gave individual savers the option to invest in a default scheme in the UK, but the option not to if that was really what they chose to do, we would find that savers would want to back the UK economy to a greater extent than we currently are doing.
The Chair: We are coming on to the Mansion House accord.
Baroness Willis of Summertown: I have a very quick question for clarity, with a non-financial background here. What do you mean by “overweight”? When you gave those examples of Canada being extremely overweight, what does that mean?
Marcus Stuttard: That metric was based on the total value of the capital market in that jurisdiction and what percentage of domestic pension funds were invested.
Q260 Baroness Northover: You have to make a very strong case for the AIM market. I would expect nothing less. I was listening to what you said, and you happened to focus on life sciences, because we gave an example of that. It would be useful to know what it looks like right across the board, rather than focusing just on life sciences, but I was wondering whether advisers to companies would share your interpretation of how companies might do on the American market.
As you have also made reference to, we have the challenge of not having as deep a pool of capital here as there is in the States, which is a problem. You also hear about greater volatility, because, if you have fewer companies, they may go up or down more than is the case when you have a much larger group, as in the States. Could you say whether your analysis applies similarly to companies right across the board, and whether advisers to these companies really share the interpretation that you have just given us?
Marcus Stuttard: If we look at AIM more broadly, we have about 650 companies on the market. They have valuations from low tens of millions up to single billions. The average valuation on market capitalisation is about £100 million.
As the London Stock Exchange, we have always made the decision to operate AIM separately to the main market rather than just having one market, in order to be able to differentiate the two. Companies know that they are operating in a market that has regulation and that has fiscal incentives, some of which we talked about, that are specifically tailored for them, with the support of an adviser community who have really built their business model around small and medium-sized companies, rather than just having one homogenous market.
That has brought lots of benefits over the years. It has meant that we have had a very broad range of companies from a broad range of jurisdictions. The core of AIM is UK companies, but we also have international companies. We had 10 IPOs on to AIM last year, four of which were US companies that all said that they had come to AIM because, with a market valuation of lower than £100 million, it would be very difficult, if not impossible, to access the public capital markets in the US, so there are real strengths there.
I am sure that, if you asked a good cross-section of advisers that support smaller companies, they would use very similar arguments to the ones that I have explained. There is, however, an incentive that has grown over the years, particularly for some of the audit firms in the UK, to not recommend an IPO at all. That is because audit firms feel that they have a much greater liability if they are supporting and auditing public companies rather than private businesses.
If I look back 15 years, the regional audit and law firms were one of the biggest parts of the marketing apparatus for AIM across the UK, and that is less the case these days than it was, but there are things that we could do to address that. The FRC is taking a very practical approach. We have heard the CEO of the FRC, Richard Moriarty, talk very publicly about the public interest entity definition and how that applies to public companies. There is a very strong argument for carving out AIM companies so that their costs are lower, but also that their auditors are more likely to support them coming on to AIM rather than seeking an early trade sale or a different form of finance.
Q261 Lord Borwick: Can I ask about the elephant in the room, which is AstraZeneca? It has been seen as a leader. Small high-tech companies that we are talking about will say to us, “Why should we expand in the UK if AstraZeneca, having expanded, decides that it should immediately go to America?” I do not think that it is definitive that it is going yet, though, is it?
Marcus Stuttard: It is not really for me to talk on behalf of a listed company. That is probably more of a question for AstraZeneca. What I would say is that a lot of the press commentary—and I have access to the same press commentary that you all have—was more around non-capital market aspects. It was around procurement from the NHS and those sorts of factors.
What I would just point out, though, as a large-cap example in the sector, is that we had the spin-out of Haleon, in which Pfizer was a big shareholder. Last year, some of the biggest equity capital markets transactions in the UK were Pfizer selling down large chunks of Haleon, so £2 billion transactions, which demonstrates the depth of the market for businesses like that in the UK.
Lord Borwick: It still would be a better position if AstraZeneca did not move.
Marcus Stuttard: Yes, of course it would, and it would be a better position if there were less commentary about UK companies that might be thinking of listing in overseas markets, rather than extolling the virtues of the UK markets. The theme that underlies a lot of that commentary is the access to capital and the need for us to increase the flow of pension funds into our capital markets.
Baroness Neville-Jones: We keep on coming back to this.
Lord Borwick: Do you think that the Government are doing the right thing in trying to keep AstraZeneca? Do you think that negotiations are going on?
Marcus Stuttard: Again, it really is not for me to talk about specific issuers. What I can say, though, is that we have a very close dialogue with the Government and with Treasury around the pipeline. A number of Ministers spend a lot of time talking to listed companies on our markets and to potential pipeline companies.
Lord Borwick: You are in touch with other markets, such as Tokyo and Singapore. Are they losing companies to America as well?
Marcus Stuttard: First of all, there is a global trend towards deeper private markets than public markets. We have seen a global trend of de-equitisation. We have seen a trend of some international companies going to the US.
I would say, though, that some of the statistics that I have given you this afternoon about the underperformance of UK businesses apply not just to UK companies. It tends to be international businesses on the US capital markets.
Q262 Viscount Stansgate: One of the more interesting statistics that you have given us, which we were aware of before, is the proportion of pension funds invested in UK equities. You said it has gone down from 50% to 4% over a period of decades. My question is about the Mansion House reforms, which, as you know, the Government are placing a lot of emphasis and hope on to consolidate pension schemes and help address the risk aversion that we see in the UK’s institutional investors. Do you think that these reforms, if implemented, are going to work, and do they go far enough?
Marcus Stuttard: There was a lot of excitement about the Mansion House compact, which has now been broadened to become the Mansion House accord. What everyone is waiting for is to see the deployment of that capital. It comes back to the thing that I keep mentioning, which is the deployment of that capital into both private and AIM-quoted companies. Because the growth markets are part of the accord’s mandate, we need to see that happening.
There are a number of ways of doing that. It is either direct investment by those Mansion House accord signatories into private companies and AIM companies, or via asset managers and fund managers that have expertise in investing in smaller quoted companies.
The increase in investment into equities should not be restricted to private and growth market-quoted companies. That increase in allocations to equities needs to be across the board and include the main market as well.
While we are here very much talking about smaller companies and about AIM this afternoon, the overall health and vibrancy of the public markets across AIM and the main market is vitally important. As a number of people have referenced this afternoon, the actions of larger FTSE 100 companies have a signalling impact on smaller companies as well, so we need to get that flow of capital increased significantly in the short term across equities.
Viscount Stansgate: If you are waiting to see how these reforms and compacts are deployed, what are you looking out for to see whether they are being deployed? What type of timescale do you have in the back of your mind as to whether these might eventually prove successful?
Marcus Stuttard: From an AIM perspective, given particularly some of the increased uncertainties that I mentioned in my opening remarks, I honestly do not feel that we have the luxury of a long time period. We need to start to see that capital deployed in the very near term.
Baroness Neville-Jones: Is that true for the main markets as well?
Marcus Stuttard: Yes.
Baroness Neville-Jones: We are interested in the main market, not just AIM.
Q263 Baroness Walmsley: Is there a role for pensioners themselves? You mentioned earlier that, if UK pensioners were asked what percentage of their pensions is being invested in British companies, they might say 40%, but it is only 4%. Is there a role for pensioner power at all and, as a precursor to that, pensioner education as to what is being done with their money?
Marcus Stuttard: Absolutely, there is a role for much broader investment education, whether that is in pension funds or other forms of saving. There is a lot of debate at the moment about ISAs, and the proportion of ISAs that are sat in cash. It is a misnomer to think that having money allocated to cash is an investment, because of the eroding impacts of inflation, so I absolutely think that there is a much broader role for investor education, and for that not always to focus on the risks and the downside, but also on the upside.
Some research was published by Schroders, talking more about ISAs than pension funds, but highlighting that, if people who currently have money in cash in ISAs had allocated that to equities over the last 10 years, they would be £500 billion better off. At the same time, not only would we get better investor outcomes, but I deeply believe that, if that capital was also allocated to the UK economy, we would get better outcomes for job creation, innovation and GDP growth.
Q264 Lord Ranger of Northwood: Marcus, listening to your evidence today is really quite interesting, because you are bucking the noise that we have been hearing. We have just been hearing that people are going. We are seeing, as you have acknowledged, this gradual decline in AIM. We have heard about pension reforms, but we are saying that the investor flow is potentially not going to come through from them and that there is still some reluctance.
The question is not only about what more Government can do, but about what more AIM is doing. You are a one-man band here advertising the virtues of AIM, but is there more that you or Government can do, either regulatorily or by championing what is going on? If I think of my pension, all the action over the last few decades has been in international markets. Advisers have always said, “It is in international markets that you are going to go for growth”. It is a general, sweeping statement.
Do we have to change that narrative? Is that something that you can do? What can the Government do to help you with that? Are you asking them? Is there regulatory change that can be done to help, by the way, in this technology market, which we can see is coming up and has opportunities?
Marcus Stuttard: First of all, I am not a one-man band. I am very fortunate to have the infrastructure of the London Stock Exchange Group behind me, as well as the AIM and small cap community, which really is unique on a global stage.
Is there more that could be done? Yes, absolutely. Part of it is education. From a pure AIM perspective, there are a couple of priorities. First of all, we are calling on Government to provide greater certainty around the very valuable package of fiscal incentives. The Government have already committed to making sure that the EIS and the VCT schemes, which are very important, will last until 2035.
We would really like to see the Government making the same sort of commitment to not make any further changes to business relief until 2035, because that package of incentives, across EIS, VCT, business relief, AIM shares being eligible for ISAs, and stamp duty not being charged on transactions in AIM stocks, has a very compelling impact if it is working. It addresses a primary capital‑raising gap, but also improves the quality of the market, because it improves people’s willingness to invest and contribute to daily trading and liquidity. If a part of that package is undermined, it undermines the whole package.
Another element that we are discussing with the Government is around the role of the British Business Bank, which plays a vital role in stimulating and catalysing early-stage investment into the venture capital community and into angel investment in the UK.
A lot of the challenges that are being faced by AIM companies are similar to challenges being faced by private scaling businesses, so we see a very strong argument for the mandate of the British Business Bank to be extended to include growth markets, not only AIM but others such as Aquis. A package of those two would send a very strong signal that the Government are really committed to smaller quoted companies and to growth markets such as AIM.
Other regulatory changes I have partly touched upon, but one would be around the public interest entity definition, which might sound like a bit of an arcane concept, but it has a really big impact. We would like AIM companies to have the same status as private businesses and to be treated in the same way, so that they can manage their audit costs and have access to a much broader range of auditors that would be prepared to act for them.
Lord Ranger of Northwood: You are having these discussions with Government. In the context of a Government that are looking for growth but now seem to be struggling to balance the books—and we are hearing of potential tax rises in various areas—how is that conversation going?
Marcus Stuttard: We are very engaged, and it is a genuine two-way conversation. This is part of a longer-term series of conversations with the Government around broader capital markets reform that very much started with the rewrite of the listing rules, involved the development of PISCES, the crossover market, and is now moving on to AIM. It is part of that broader package.
Q265 Baroness Northover: You have talked a bit about the Mansion House reforms, and there has been some scepticism as to whether the pension funds will head in this direction, but let us assume that they might. There are some questions in that. Are you concerned that institutional investors might focus on infrastructure and other projects to satisfy their Mansion House requirements, rather than UK science and technology growth companies, which is what we are looking at here?
If that is the case, is there anything that the Government should or can do to address this and make sure that the investment opportunities are more apparent? Following on from that, what signs would you want to see in the next year or so that would indicate that the reforms in general are having the desired effect?
Marcus Stuttard: There is a risk. The reality is that the larger a fund is and the more capital it has to deploy, the greater the likelihood that that capital goes into larger projects or the largest, most liquid companies.
It is vitally important that we keep a close eye on the allocation of that capital. It is very helpful, not just in the Mansion House accord, but also in the pensions Bill, that there is a specific reference to AIM and to growth markets. We need to make sure that there is high-quality disclosure on where funds are being deployed, so that we can keep a track of that and make sure that it is being deployed across the board into key sectors, which would probably be the industrial strategy sectors, as well as across regions and nations, and not just into private companies but into quoted companies as well.
Going back to a point that I made earlier, it is vital that we do not focus on just one element of that funding continuum, but on private markets, the growth markets as a crossover, and then the main market.
Baroness Northover: That may be what you want to achieve, but how do you achieve that?
Marcus Stuttard: The first step is better-quality disclosure. I mentioned those statistics earlier about the weighting of pension fund allocation in the UK compared to other markets. It was not an easy exercise to undertake, so better disclosure is a key priority.
Baroness Neville-Jones: How do you get better disclosure? Is this a corporate code issue? How do you get people to say more?
Marcus Stuttard: Pension funds and investors clearly have very sophisticated risk management processes and management information processes, so I would not have thought that disclosing the outcome of their investment strategies would be a particular challenge.
Baroness Walmsley: Why do they not do it?
Baroness Neville-Jones: It does not happen at the moment.
Marcus Stuttard: That may be, in part, because their own investors are not asking for that disclosure.
Q266 Lord Lucas: You have talked about what you would like to see done with cash ISAs. Are there any other measures that you would like to see to support private investment in quoted equities? Looking at the pension fund side, would it be reasonable for the Government to say, “If you are going to claim tax relief, you have to invest at least that much in the UK”?
Marcus Stuttard: The incentives that exist in the UK are of a very comprehensive nature. The operators of some of my peers in international markets look at the incentives available in the UK very enviously. We have a comprehensive set of incentives, but I do absolutely think that, if taxpayer money is going into de-risking companies at an early stage, there should be more of a payback to the UK economy and to UK taxpayers. There probably are ways of realigning some of the tax incentives to make sure that the benefits redound to the UK to a greater extent than they currently do.
The Chair: We have some questions on PISCES.
Q267 Baroness Walmsley: For the sake of anybody online who does not know, this acronym stands for private intermittent securities and capital exchange system. I had to look it up myself. It is one of the financial reforms that the Government are introducing. Could you set out how this will affect access to finance for innovative science and technology companies? Is it filling a gap that really does exist? Will it result in significant capital funding flowing into these companies? Since it is set up only for a trial period of five years, what will you be looking for during that period? What would be your markers for success?
Marcus Stuttard: PISCES is the name of this new regulatory framework that the Government have introduced and that we are very supportive of. We have applied to the FCA to launch a market, using the PISCES regulatory framework, which will be called the private securities market.
What PISCES or our private securities market are seeking to address is this challenge of companies being sold too early. I mentioned earlier that I feel like I have a real privilege in talking to a very broad range of not just existing listed and quoted companies but also private businesses. My team and I can sometimes have a relationship with a company that we identify as a good IPO prospect 10 years ahead of a potential IPO.
One of the most frustrating things is to identify a company, see the potential future opportunity for it, and find that, in the intervening period, it has been sold. One of the reasons that companies are often sold early is to provide an exit or liquidity for investors, founders and employees, and that is what PISCES is seeking to address. It is a secondary liquidity venue rather than a capital-raising venue. Companies will not be able to do a primary capital raising on the venue; they will be able to do so between trading events, but it will provide investors and employees in companies with better access to liquidity.
We very much intend for our private securities market to enable companies to continue to grow, scale and stay in the UK, so that, if some of those companies decide to transition and become a public company, and do an IPO, that transition to an IPO should be a lot easier.
We have talked a lot about pension fund reform and pension funds being able to invest in private companies. If they are able to build stakes in some of these PISCES businesses through the venue, attracting those investors should be a longer-term and more seamless process.
Baroness Walmsley: It sounds like, if there is gap, it is filling it, and it is pretty crucial that it should be. Is that what you are saying?
Marcus Stuttard: This addresses a very important gap. It will be a global first, because, while there are platforms globally that enable investors to trade shares in private companies, there are not venues that have the backing of a bespoke regulatory framework that puts the company at the centre and in control.
Baroness Walmsley: What are the markers over five years that you would look for?
Marcus Stuttard: It will be the number of companies that have used the venue. It will be the amount of trading that takes place on the venue. It will be factors such as the increased investment that these companies have by being traded on the venue.
Q268 Baroness Neville-Jones: There is an argument that goes the other way on PISCES. I found your analysis convincing, but it is clearly advantageous if you can get a company to grow more while still private, and to be more substantial and less open, therefore, to having tempting offers. What about the argument at the beginning, which is that the companies going on to AIM will compete in the private markets for a relatively limited pool of capital? Is there a danger, therefore, that the growth of the PISCES market reduces the potential capital available for AIM listing, or do you reckon that you can get the total pool of available resources to grow as well? That does seem to me to be a necessary part of this argument.
Marcus Stuttard: We firmly believe that we can make the cake bigger.
Baroness Neville-Jones: You do. How?
Marcus Stuttard: We do. First of all, as we touched upon earlier in the session, the supply of companies is not the challenge in the UK. We have over 40,000 visible scale-ups and over 160 unicorns. There are plenty of companies that are growing. Many of those, by the way, will never become public companies through an IPO. Even if those companies never go public, if we can service them much more effectively in the UK, rather than them having to seek either international investment or international venues for liquidity, we stand a much better chance of keeping them as either private or public.
Secondly, when some of the conversations about PISCES started, there was a perception that it would just be a smaller companies venue. What we are seeing is that the companies that we are talking to and that are in the pipeline are often very large businesses that, in many ways, would be too large for AIM, so we see it as complementary.
Also, our private securities market will be very clearly differentiated from our public markets in a number of ways. First of all, our public markets—both AIM and the main market—provide companies with continuous liquidity and disclosure, which is one of the things underpinning the profile and the credibility of those companies that I talked about earlier.
Secondly, our public markets are open to the broadest range of investors, from individuals through to institutions. PISCES venues will be available only for institutional and high-net-worth investors. Finally, PISCES venues are not capital-raising venues in themselves. One of the key drivers for most companies that come to AIM or the main market is to do a primary capital raising.
These are some very key differentiators. By enabling companies to scale for longer and to get to a stage where, for those that want to IPO, they are of a size and a scale that they will benefit more from being public, we can grow the pipeline of public companies.
Baroness Neville-Jones: I would have thought that high-net-worth investors are already investing, because that is how they become high net worth. Are you saying that you think that you can get them to invest more than they already are and grow that market? Somehow, you have to provide these extra resources.
Marcus Stuttard: At the moment, investing in private companies is conducted by the largest institutions, by private equity firms, or by a relatively narrow set of high-net-worth individuals who have contacts within that particular industry.
Baroness Neville-Jones: So you reckon that a regulated framework will increase that.
Marcus Stuttard: Yes, it will broaden access.
Baroness Neville-Jones: I get it.
Q269 Baroness Neuberger: We have touched on some of the things that the Government are now doing, with a range of reforms that are under way to try to solve the problem of financing and then scaling up.
We have two final questions for you. First of all, what are the chances of these current reforms that are under way solving the problem? Are the Government doing this with a degree of urgency that is enough to make this work?
Marcus Stuttard: We have had an unparalleled level of capital markets reforms. We have touched on many of them today. There have been a lot of others as part of that package. I absolutely think that that package of reforms has made a real difference. It has made our markets match fit compared to international venues. It has removed a lot of the hurdles and barriers that have been perceived by founders, management teams and investors in private businesses. We have made some very good progress, the impact of which we should not underestimate.
The remaining piece of the jigsaw is getting more capital flowing into our markets, both private and public markets across AIM, and the main market. It is about access to capital and having a shift in culture and mindset. We talked a bit earlier about investor education and making sure that our electorate and our society at large see the strengths of the UK economy and the opportunities that exist, do not see either capital markets or business as something that is alien to them, and want to have a greater stake in UK companies than in less regulated assets.
Baroness Neuberger: We are putting you in the position of writing our report. What are the top recommendations that you would make to Government to get this to happen?
Marcus Stuttard: Specifically from an AIM perspective, it would be greater certainty around the fiscal incentives. I keep coming back to this point. In the short term, that is my biggest challenge. It is the issue that I am talking about on a daily basis with AIM companies and AIM investors. They are all looking for much greater certainty that the Government are supportive of the growth markets of AIM and of that package of incentives that currently very helpfully supports, but there is a feeling that it is under threat.
Also, from an AIM perspective, as I mentioned, I would like to see the mandate of the British Business Bank extended, because, again, it would be a strong signal of government support. I would like to see reforms around public interest entity definition and the accounting point that we have talked around.
More broadly, I would absolutely like to see, and for it to be measured, that our largest institutions are backing the domestic economy to a much greater extent, that we reverse the outflows that we have seen for the last two decades, and that we start to have greater deployment of UK capital into UK companies.
The Chair: That is a very constructive way of ending the session. Thank you for giving such informative evidence. We appreciate it very much.
