The exodus from London to other exchanges has been led by mega and large caps, not small to mid caps, although merger and acquisition activity, the relative dearth of IPOs, and delistings from Aim all mean that the ranks of listed and quoted companies has thinned out.
Mid and small caps have therefore contributed to the one-fifth drop in UK stock market listings since 1996, but the US’s are down by a half, so the challenges of weak IPO markets and reduced listings may not be unique to UK.
In this context, Russ Mould, investment director at AJ Bell, says cries for deregulation could conceivably lead to problems further down the road and sow the seeds of future scandals and accidents, if the rules favour sellers, as firms list, and investors, the buyers of that newly issued paper.
Mould says: “Perhaps the issue at hand is a wider one, namely de-equitisation, to use a nasty neologism.
“Regulation is tighter after the form of the Sarbanes-Oxley Act of 2002 and Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in the US, and the UK Companies Act 2006 in the UK.
“Changes to the UK corporate governance code and UK stewardship code, the introduction of the senior managers and certification regime for financial services firms, and calls for ever-greater disclosure on environmental, social and governance issues, as well as financial performance, all increase scrutiny with the goal of promoting transparency. They do, however, also increase the cost and burden of being a publicly listed company.”
The changes were introduced in response to market accidents and scandals and as such were designed to protect investors.
Changes in tax policies or regulatory frameworks can significantly affect the profitability and growth prospects of small to mid-cap companies.
And, given the challenges the UK is facing at the moment, it is a potential concern for investors.
Scott Gallacher, a director at Rowley Turton, says: “There has been concern about UK small caps delisting from the London Stock Exchange due to factors like declining valuations and increased costs. A report highlighted that around 600 UK companies with less than £1bn market value have delisted over two decades.
“Companies may choose to list outside the UK to access larger capital pools, benefit from higher valuations, or operate under more favourable regulatory environments.”
The sentiment might be to roll back protections, but Mould stresses this could increase the risks for buyers.
He adds: “If nothing else, more risk generally means a lower valuation multiple of earnings or cash flow, as investors seek compensation for the greater dangers, which also means they could demand a higher yield, either through higher dividends or a lower share price.
“The bigger issues that may be at work, besides regulation, include a long-term trend to lower interest rates, which means debt is a cheaper and more attractive option relative to equity. Another is the rise and rise of private equity, funded by ever-cheaper debt and favourable tax treatments, which shield executives from the public glare and the demands of shareholders.”
“There is no apparent quick fix for either of those, especially as interest rates are trending lower once more, although any unexpected problems in the private equity arena could change things, should they find themselves needing to sell assets (and relist them) rather than gobble them up at a relentless rate.”