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When the UK fintech company Wise announced last week that it would move its primary listing to New York, it sounded like more bad news for the London Stock Exchange. But the decision by its Estonian founders and board to seek growth and liquidity in the US was worse than that.
Since Wise has picked America for its larger investor pool and potential for a higher valuation, so may Revolut, which started in an incubator in Canary Wharf and was valued at $45bn in its last funding round. The UK’s patient efforts to cultivate a valuable fintech cluster in the City of London will culminate in the cream of the crop taking what the country has to offer and then moving.
That is rather ungrateful, but what can the UK expect? These companies are majority owned and funded by international investors and have little inbuilt loyalty to London. As Nik Storonsky, Revolut’s Russian-born, British-French co-founder, said last year in his characteristically blunt manner, it is “not rational” to list in London rather than New York.
London re-established its role as a global financial centre in the 20th century partly because it had a critical mass of investors willing to buy equity in UK-listed companies. The City’s sceptics often complained it was more globally than British focused, but insurers and pension funds invested enough to support domestic growth along with international expansion.
In investment terms, London now feels as if “there’s no there there”, as Gertrude Stein said of Oakland, California. Institutions still have plenty of capital: pension funds hold about £3tn. But too little of that goes into building the economic future. In 1990, more than half of the portfolios of pension funds and insurers were UK-listed equities, but the figure has fallen to less than 5 per cent.
This is an emergency for the British economy, arguably more damaging to growth than Brexit and also self-inflicted. UK entrepreneurs and companies are sometimes criticised for lacking US-style ambition but as Michael Tory, co-founder of the financial adviser Ondra Partners, says: “That’s like blaming the patient for not breathing when you’ve cut off the supply of oxygen.”
Some of the shift away from UK equities has been caused by population ageing but it was accentuated by a series of tax and regulatory changes over the past two decades. These incentivised pension schemes to invest more in bonds and to diversify globally. About a quarter of pension portfolios are held in international equities, far outstripping their UK commitment.
UK institutions are left with virtually no bias towards domestic equities, in contrast to counterparts in the US, Australia and Sweden. As Storonsky noted, stamp duty on trades in UK-listed shares is another disincentive to list in the City. If Wise obtains a primary listing in New York and keeps a secondary one in London, it will be cheaper for UK investors to trade on the former.
Many UK companies with US operations or potential to expand are considering floating or moving listings there, although the gains are not assured. More of the financial returns from British enterprise will flow to US investors: the technology group Arm listed in the US in 2023 at a valuation of $55bn and was this week valued at $148bn.
It is vital for the UK to increase its flow of equity capital, both to retain and attract companies and to provide the annual £100bn investment estimated to be required to raise its economic growth rate. Recent reforms to listings rules to make the UK a more attractive financial centre were valuable but insufficient: the government needs to take further action.
So far, it has advanced cautiously. Its Mansion House Accord with pension schemes last month involved commitments to increase investment in infrastructure, property and private equity, with a backstop of compulsion. It can go further by reforming tax incentives for investment in public companies, which are perverse at best.
As well as abolishing or reforming stamp duty on share trading, it should encourage individuals to channel more into equities than cash through their individual savings accounts (ISAs). It could also nudge them by making workplace pension schemes invest a higher level of their contributions in UK equities unless they opt out.
The government could even consider matching individual tax relief on pension contributions to levels of UK investment. This would be radical but unless something changes, pension funds will carry on investing too little in UK growth and companies such as Wise will keep thinking there is no particular reason to remain.
