British pension funds to blame for companies floating in New York

Here we go again. The trickle of British companies floating their shares across the Atlantic rather than in the UK is turning into a flood.

In another blow to the City’s reputation as a vibrant listings hub, commodities broker, Marex, plans to float in New York next year.

Piling on the agony comes a decision by UK betting giant, Flutter – which owns gambling brands such as Paddy Power – to also list in the Big Apple by the end of January. It will keep its London listing for now.

These latest moves follow on from what can only be described as an embarrassing few days for the London Stock Exchange.

Earlier this week holiday giant Tui Travel revealed that investors will vote on plans next year to switch its London listing to Frankfurt because of greater liquidity in the German stock exchange.

There have also been two delistings after Ten Entertainment and Aim-listed Smarter Metering Services (SMS) were snapped up by US private equity.

While these delistings are of a different nature, the reasons why Ten and SMS have been taken private is part of the same underlying problem – UK companies are fundamentally under-valued compared with their international peers.

According to investment bank Panmure Gordon, they trade at a discount of 19pc to the rest of the world.

Take Marex, which only two years ago tried to float in London. Sources close to the broker say it will achieve a much higher valuation – it hopes £2.2billion – by listing in New York because the US investor base is bigger and the liquidity pool is deeper.

It also makes sense for Marex to go transatlantic as nearly 40 per cent of its business came from the US last year and this is expected to rise this year.

There’s no getting away from the fact that US capital markets are vast and deep while its domestic investors are more courageous about taking risks – it’s a cultural thing. By contrast, the UK’s institutional investors don’t appear to like risk. 

Worse still, City research shows they actively shun investing in UK corporates and chronically under-allocate funds to them compared with other major economies.

Put bluntly, the UK’s pension funds are starving our own industrial base.

And the City is well-aware of the problem. In a letter to Chancellor Jeremy Hunt earlier this year, the Capital Markets Industry Taskforce made the point starkly – the three largest pension schemes in the UK are 40 per cent underweight relative to the size of the equity market.

And NEST, the country’s biggest defined contribution workplace pension scheme by members, has less than 0.5 per cent of disclosed holdings in its top 100 investments in UK listed equity. How extraordinary. By contrast, France is 889 per cent overweight in its domestic market, Italy is over 900 per cent overweight while Canada is 247 per cent overweight.

How can this be changed in the UK? By altering the risk weightings held by the public sector and Defined Benefit allocations of the funds away from gilts to equities – UK ones. 

At the same time, we have a tax system that crucifies private investors. It is no wonder the number of households which invest in the UK stock markets has halved over the last two decades to around 11pc.

Radical reforms to ISAs – along with tax incentives – should be of the highest priority. 

Indeed, Hunt should look at Sweden where the number of private investors has doubled to 22 per cent over the last few years, all thanks to a high-profile public information campaign but mainly because of a simple single rate tax at 1 per cent of assets. No complicated capital gains tax. 

No horrible paperwork. But big pools of capital are flowing into Sweden’s small to mid-cap companies.

And then there is the question of the London Stock Exchange itself.

Do the exchange bosses do enough to sell the advantages of the public markets to chief executives? Or are they so fixated on the data side of the business that they ignore the cash markets? Maybe the time has come for the exchanges to be hived off into more dynamic ownership?

You can bet your bottom dollar that the sassy head of international capital markets at the NYSE, Cassandra Seier, has been out chatting up the Marex and Flutter teams.

Have David Schwimmer and Julia Hoggett, the exchange’s big cheeses, been out wining and dining Marex boss Ian Lowitt? If not, why not?