‘“Is greed still good?” — John Coates argues in his new book that a small number of large financial institutions — index and private equity funds — increasingly pose a threat to American democracy and to themselves’
Harvard Law Today
The front page headline of the London Evening Standard last Wednesday 27th March was, ‘Flight from Stock Exchange — fears of City crisis as more London financial giants look to New York’; their full story was headed, ‘Stock Exchange alert sounded over investors turning backs on London’. It's not just capital raising which has collapsed over the past few years: large listed companies are also moving away, mainly to New York.
When I first started work in the City in the 1970s, there was no question as to whether London was the pre-eminent world market. Notwithstanding the impact of the 20th century world wars, the legacy of the British Empire had contributed greatly to the London Stock Exchange’s world standing.
It's a very different world today, however, and the United Kingdom will have to work hard and plan differently to avoid becoming a financial backwater.
Arguably, the zenith for the London market was the ‘Big Bang’ in 1986 when the roles of principal and agent were merged, resulting in mass takeovers in the financial world. As long-term Share Radio listeners will be aware, my view is that this revolution significantly undermined our financial systems, being largely responsible for the 2008 financial crisis. More recently, Brexit and the pandemic have brought their challenges — these may be short-term jolts to the system but, in my view, the malaise is long-term: we are thoroughly addicted to short-term thinking, not just in Government but also in financial markets.
The clearest evidence of this in financial markets is the dominance which Private Equity has been allowed to command: in the past ten years, 137 companies worth $148 billion (£117 billion) have been taken off the London market by private buyers.
Private Equity has had the upper hand in London for at least the past fifteen years. These powerful but shadowy financial institutions have used the decades of rock-bottom interest rates to muscle their way into listed markets, arguing that it was much easier to restructure companies out of the limelight than to attempt to do so under the regulatory glare of an open listing. The UK Government lavished them with tax breaks on interest charged on their debt, and they systemically scoured the stock market for companies and sectors where large returns could be made from short-term rationalisation.
With a typical five-year investment horizon, they leeched huge sums from investors in listed companies by taking advantage of low stock market valuations, in order to line their pockets from repeating the exercise again and again.
We are now starting to see the long-term damage that has resulted from this rape of the British stock market. Not only has its premier world standing been shaken to the core, but the fact that Private Equity businesses have no national allegiance to the United Kingdom has allowed them to move both their winnings and their privately-owned company acquisitions overseas. The fact that in many cases their principals appeared to be London-based may also have resulted from decades of them benefiting from ‘Non-Dom status’: Chancellor Jeremy Hunt's alignment with Labour to abolish this tax exemption may now show the fallacy of placing trust on their staying in London.
Like the Road Runner heading over a cliff edge, the Bank of England is now warning of the danger to financial stability posed by the $8 trillion Private Equity market as buyout firms and the companies they own wrestle with higher interest rates on their debt mountains (‘The Times’, 28th March). This may be an immediate danger, but it wholly ignores the long-term damage caused by Private Equity to the London stock market.
As in so many areas, it is vital that the next Government gets a grip on this long-term challenge. If we genuinely believe that democratic capitalism is the right economic path to take, then we simply cannot favour a process of massive financial intermediation which destroys quoted equity markets. Individual participation is essential, not only to sharing wealth but also for enabling a sense of ownership and responsibility, and corporate governance involvement.
In order to restore the United Kingdom's global standing in finance, we need both markets and Government to adopt strategies which will support democratic and more egalitarian capitalism, including placing more emphasis on real ownership. The way forward is not to promote heavyweight financial intermediation, whether in the form of private equity, derivative markets, blockchain or crypto. It is to restore an interest in an individual sense of real ownership, which comes through having a share in companies listed on the stock market. This brings the benefits of global business to the United Kingdom in the form of capital gains and dividends.
In respect of the value attached to dividends, it's worth noting that a survey of 1,000 UK investors by eToro has found that 31% of investors aged 18-34 say that they plan to invest more in dividend-paying stocks (The Times, 30th March). One of this week’s episodes from Motley Fool Money also draws attention to the benefits of investing for dividends.
Government should do more to support this change: by removing tax breaks on debt interest for Private Equity, abolishing stamp duty on share purchases and restoring a strong global emphasis on overseas trade. In this latter respect, this is the one area where Liz Truss did particularly well in her role as Foreign Secretary, building a strong momentum for post-Brexit trade deals.
As for Non-Dom status — while on the surface its abolition may appear to work against global ambitions, I would rather see steady reductions in corporation tax, designed to follow Ireland in attracting global business headquarters to the United Kingdom, than lining the pockets of a few rich individuals who have no long-term allegiance to this country.
The one thing we should not do, however, is to allow the current process of retraction to reduce our British footprint on the world stage. If we recognise the need for steadily increasing global governance, we must be there to take a central part in its evolution — just as we used to do when we were a member of the European Union.
Gavin Oldham OBE
Share Radio