“INDUSTRY IS becoming more internationalised, and British industry must be ready to meet American and German competitors who are generally financially powerful and backed by banking and financial groups. Without similar support, British industry will undoubtedly be at a disadvantage, particularly in the establishment of British enterprises abroad. It will, therefore, have to keep in close touch with institutions connected with international finance. Industries and financial institutions will thus have to co-operate so that each is thoroughly intimate with the affairs and position of the other.”
“Closer co-ordination between British industry and the City of London would be advantageous for the provision of long-dated capital, especially for large-scale industry. In some respects, the City has better facilities for providing capital to foreign countries than to British industry.”
These two excerpts come from a summary of the Macmillan Report, published in 1931. As a result of this report, which first highlighted an equity gap, the forerunner of Investors In Industry (3i) was established. This initiative brought the banks closer to businesses and enabled many businesses to finance their development, grow, and create jobs.
However, it seems there may still be a case for suggesting that the London markets are focused on providing capital to foreign entities rather than to British industry. Of all the IPOs on AIM in the last few years, 25% have involved international companies. Some 20% of all AIM companies are international and they make up nearly 40% of the market capitalisation.
Is the success of these companies masking the fact that domestic companies may be losing out in getting the funding they need to be able to grow and create jobs? When times were better for IPOs, some small cap fund managers bemoaned the high proportion of foreign companies coming to market, as opposed to quality UK ones.
One of the problems for owners of small companies considering public equity markets is ensuring that enough shares are in public hands to create a liquid market in the shares. They must do this while not diluting the shareholdings of the owners too much. The owners are often concerned that they may be giving away too much too early.
One way of overcoming this may be to encourage the development of a corporate bond market for smaller companies, both private and publicly quoted. This would enable private companies to issue publicly held debt and maintain their equity holdings. This could act as a bridge for companies that need more than bank finance and wish to gain experience of public markets without taking the step of a full-blown IPO. This sort of market is being developed in Germany, with some success, and is attracting interest across Europe as one way to help fill the equity funding gap.
It will be interesting to see whether this sort of “closer co-ordination between British industry and the City of London would be advantageous for the provision of long-dated capital”, as the Macmillan Report said 80 years ago. The Quoted Companies Alliance is keen to promote the debate on this and we will keep you updated on several interesting initiatives in this area.
Tim Ward is chief executive of the Quoted Companies Alliance. His past roles include head of issuer services at the London Stock Exchange and FD at FTSE, the index company.
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