Capital goes where it is welcome. The same is true for those seeking to raise it. A planned reform of fundraising rules unveiled this week is aimed at helping to make the London Stock Exchange more hospitable.
Considering updates to the rule book makes sense, even if companies trading on the LSE do not struggle to raise funds. Over the decade to 2020, the secondary capital raised amounted to roughly 1 per cent of market capitalisation, behind Australia but ahead of the US and the Netherlands.
Nonetheless it is a bureaucratic and time-consuming process. The plan to double the limit on how much money UK companies can raise without giving existing shareholders the right of first refusal will make it easier and quicker to raise small sums.
It is part of a wider set of reforms embracing dual-class share structures, free floats, prospectus requirements and special purpose acquisition companies (Spacs). There appears cross-party support for boosting the competitiveness of the UK market. That is despite the risk that looser rules erode investor confidence. Plus, a tech rout and an end to the Spac boom diminish the US gloss.
Still the UK’s efforts may not yield a lasting advantage. Brexit has encouraged potential issuers to consider Paris, Frankfurt and Amsterdam alongside London. Innovations are quickly copied. Germany has just announced a rule change to improve access to capital for start-ups and growth companies. The EU plans legislation to make it easier and cheaper for companies, particularly smaller ones, to access public markets.
Cutting costs and regulation can only go so far as to arrest the decline of UK public equity markets. The number of companies listed on them has roughly halved over the past 25 years, says think-tank New Financial. Instead, the UK attracts bargain-hunting foreign buyers and private equity houses.
Moreover, many entrepreneurs would prefer to steer clear of public markets believing they foster short-termism. Improving the appeal of the UK market will not stop private spaces looking altogether more inviting to some.
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