THE CITY GRUMP
The fiasco that is Covid19 has shone a spotlight on how government departments react to a crisis. The instinct of the Treasury has been to lend lock-downed companies of all shapes and sizes cash. This is not surprising as the concept of debt is familiar to one and all and, since the Country is run on debt, why not issue a whole load more? But now thoughts are turning to what to do, especially in the Small and Medium Enterprise (SME) area, when this tap is turned off.
Step forward Sir Adrian Montague, chairman of the slightly sinister sounding The City UK Leadership Council. His pedigree is: City law firm, CEO of the Private Finance Initiative (oh dear!), cocked up the sale of Friends Provident and now Chair of struggling Aviva. On his “Leadership Council” sits an Armada of the City bigendians, so endless banks, City lawyers, insurance companies, some of the mega fund managers and the top four accountancy conglomerates (if you’d like to see the lot of them, in my view a disturbing sight, go here).
Frankly, these exalted beings have as much first-hand experience of the lives of SMEs as Len McCluskey has of editing Vogue magazine. But Montague & Co know that because they have dedicated significant parts of their working lives to buttering up the Treasury, they can have the brass neck to advise dishy Rishi what is best for SMEs now. Surprise, surprise, urging Sunak to make it more conducive for SMEs to issue equity is not on their agenda. Instead let’s issue a melange of State-owned preferred, share capital, something called Growth Shares for Business run by a State body tasked with regenerating regional economies, and finally an instrument akin to a student loan fund for very small businesses that are then charged with paying that back over the lifetime of those businesses.
History teaches us that major crises speed up change, so it really shouldn’t be too much to expect the Treasury and our glamorous Chancellor to look again at how best to create an environment where SMEs, which provide the backbone of the UK economy, can attract long term capital and that plainly means equity not debt. Instead all that’s popped out of 1 Horseguards Parade so far is yet another exploration of how they can increase the take from Capital Gains Tax (CGT). Once again the Treasury is looking through the wrong end of the telescope. Why? Well to answer that I need to start with a bit of background and here I am indebted to Keith Hiscock at Hardman & Co for his research statistics (you can find the whole piece here).
Since the turn of the century the number of companies listed on the London Stock Exchange has halved. Since 2007, the year before the banking crisis hit, the main market had 1239 listed companies and the fast-improving AIM market had 1694 constituents. But by the end of 2019 the main market had lost one-third of their companies with just 831 continuing and AIM had lost no less than half their number, coming in at just 863 companies. However you want to look at this, the attractiveness of having your equity on a publicly-traded market has disappeared over a cliff in just 12 years. In turn this means UK equity markets are losing the ability to raise long term capital and in 2019 just 36 companies joined either the main market or AIM. Note all of this was before Covid19 hit town.
Someone somewhere in the Treasury will be aware of these awful numbers. It is just possible that some of the exalted ones on The City UK Leadership Council might know of them, but all both Bodies can do is fiddle faddle with post Covid loan schemes and suggest another turn of the screw on CGT.
Pathetic or what?
So let’s start looking through the right end of the telescope. Equity markets naturally operate in a risk environment since the share price of a company goes up and down as the collective opinion on its fortunes change. Markets need a number of things to thrive. They need sound governance, ability to settle trades promptly, transparency and trust. But they also must have the oxygen of liquidity. If you can’t trade the shares of companies in material quantities hour by hour, day in, day out, then the market will disappear. Bearing all this in mind how keen are you, when you have made a gain on your investment then to have it taxed? How much keener would you be if you were able to participate in this marketplace if you knew that successful investment would not be taxed? Answers please to Rishi Sunak, 1 Horseguards Parade.
Accordingly it does not take a genius to realise that if CGT was abolished on investment in all UK stock market SMEs (I suggest a working definition of such SMEs would be those with a market capitalisation of up to £250m) there would be a massive increase in investor interest in these companies. A virtuous circle then forms. What would that be? “Simples” as a certain TV ad puts it. Liquidity immediately jumps in existing main exchange and AIM companies, which in turn attracts more companies to come to market, which means more capital is raised, which generates more economic wealth as the capital is employed, which (surprise, surprise) generates more sustainable tax revenue for our Mr Sunak.
I can almost hear the Treasury wailing that in year 1, i.e. before the virtuous circle gets going, “but we will lose a great swathe of the £9.8bn tax revenue that CGT currently generates”. My answer to that is you are just blowing £3.8bn in lighting a stamp duty fire under the house market (note to readers: this week my mother-in-law put her house up for sale and within 36 hours she had agreed the sale of it at full asking price, so buy now while stocks last), and £4.1bn on giving diners £10 off in restaurants during August. And you demur at doing something really constructive for the long term economic well-being of our country??
What about all those thousands of earlier stage companies that are just too small to take advantage of my CGT proposal? Here I have to declare an interest because as Chair of the crowdfunding aggregator, Nextfin, we have launched a campaign to persuade the government to increase the Enterprise Investment Scheme (EIS) tax relief available to investors . Our argument is that these companies have in general suffered very badly from the Covid19 fallout and therefore investment risk has greatly increased. Raising the EIS tax relief cap is an effective way of helping new investors take this risk in the Covid environment. You can read about the campaign here.
We are being told that the long term consequences of lockdown will change our lives. I agree. So let’s get on and do really positive things to help the SME lifeblood of our world rather than come up with the usual sticking plasters that the Establishment always seem to fall back on.
The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in startups. The City Grump’s publications are available here.