At a time of perplexingly exuberant stock indices, with flash mobs prowling the internet seeking to squeeze short-selling hedge funds, it might seem an odd moment to focus on loosening stock market regulation.
But Britain has just done Brexit without much of a deal for financial services. So with an eye to boosting City activity, the chancellor, Rishi Sunak, is casting about for a “Big Bang 2.0” to make amends.
Among the initiatives Mr Sunak has sponsored is a review by Jonathan Hill, once the EU’s financial services commissioner. The mission? To encourage more companies to list on UK exchanges. This is not, to be fair, a phantom issue. The number of initial public offerings has been dwindling, from 127 in 2000 to just 50 last year.
That partly reflects the choice of such companies as Deliveroo, the power supplier Ovo Energy and the online bank Monzo all to stay private for longer. Others are simply selling up or floating overseas. It’s part of the reason why the total of UK main market listed companies more than halved from 2,405 to 1,138 in the last two decades.
The report is not yet out, but the call for evidence has already elicited a familiar barrage of “solutions” from interested parties such as London Stock Exchange. These include letting company founders keep control through dual-share structures and reducing the length of a firm’s required trading record. Another proposal would cut the proportion of shares that must be freely available to trade after an IPO. Some favour creating a new “growth” market to mirror America’s Nasdaq.
The problem with all these answers is not simply that they risk inflating a dotcom like bubble of duff IPOs which then goes pop. It is also that they look at stock markets in isolation — as if this were the only route by which entrepreneurs could raise capital and investors take stakes in growth enterprises. This is plainly not the case.
The flipside of shrinking public exchanges is the growth of private markets. These have increasingly usurped exchanges and are cheerfully financing young ventures. If there’s a concern, it is about the balance of regulation: that the burden of rules has driven companies from transparent public venues to opaque and under-regulated private ones where leverage can be excessive, access restricted and fees sky high.
One person who thinks that is exactly what has happened is the US-based economist Luigi Zingales. In a 2009 paper, he warned that companies were rationally staying private, reflecting the “increase in the cost of public ownership vis-à-vis its benefits for an increasing number of firms”. This, rather than superior investment performance, may be one reason why the net asset value of private equity funds has grown twice as fast as global public equities since 2002, as McKinsey data shows.
What are these excess costs? Well in public markets, they spring mainly from ever increasing disclosure requirements. Just look at HSBC’s annual report. Over the past 20 years it has almost tripled in size from 120 to 334 pages, largely due to the insertion of reams of boilerplate material. There is scope for reducing these burdens. Few think that consumers of annual reports are three times better informed than they were in 1999.
Rather than demanding ever more small print, regulators should focus on eliminating conflicts of interest between intermediaries and end investors, Mr Zingales argues. In the case of private markets, for instance, this means they should face far closer scrutiny. Unlike quoted companies, buyout firms presently have to disclose very little. They should tell the public — whose money they are ultimately investing — more about their strategies, fees and performance. Returns should be presented in a way that allows direct comparison with rival buyout firms as well as quoted equities.
Boris Johnson’s government has promised to “level up” regions. It’s an approach it could usefully apply to the relationship between public and private markets. If stock markets are emptying, it is not just because the rules they impose are too costly. It is also because those on private markets are insufficient.
Getting the right capital to the right opportunity is about pulling on more than one lever. To make markets work better, you must set them in balance first.