Prove what Britain’s worth, says MAGGIE PAGANO

Prove what Britain’s worth, says MAGGIE PAGANO: Over last 20 years or so UK investors have fallen out of love with British equities

Amid the blame game going on over SoftBank’s decision to float Arm in New York rather than London lies one irreducible fact which is not receiving enough attention: over the last 20 years or so British investors have fallen out of love with British equities.

The numbers from the New Financial think-tank speak for themselves.

UK pension funds used to own 39 per cent of all London Stock Exchange-listed companies and today own just 6 per cent. UK insurance funds once invested 27 per cent of their portfolios, today it is 5 per cent, while UK asset managers now only invest 10 per cent of their allocation, rather than 26 per cent two decades ago.

This huge shift from equities to bonds – actively encouraged by the authorities and which indirectly led to the explosion over Liability-Driven Investments (LDIs) – has had several devastating impacts on the growth of British companies, the way that capital is allocated to them and the depth of London’s capital markets.

More critically, it has also shifted the mood and culture within the investing environment, making all UK investors risk-averse.

Sinking feeling: Over the last 20 years or so British investors have fallen out of love with British equities

This, in turn, has led to much lower valuations being put on companies compared to their US, and even European, peers.

So you can’t blame those high-growth or more mature companies, particularly those in the tech sector, which are looking longingly across the Atlantic to see the multiples being achieved by their peers.

Indeed, the climate here has dried up so badly that several chief executives in some of the most exciting, cutting-edge UK life science and biotech tell me they go straight to the US funds to raise money because venture funds here don’t want to know.

If great British companies can’t get domestic investors from their own pension funds to back them, then why would overseas investors want to follow?

Everything else being flagged by the Arm debate as an explanation for why the City is losing out to New York – the UK’s tough listing requirements, criticism of high pay or even ESG concerns – is a distraction.

While attempts to improve and reform London’s capital markets, such as the Chancellor’s Edinburgh Reforms and the Hill review, are worthy, they do miss the bigger picture.

One City figure put it more baldly: there are no domestic equity investors here, everything else is a symptom. He said global investors look to domestic investors for the signal for validation, ‘and that local signal has simply flickered out’. Some might say the power supply has been switched off too.

So it’s important that London Stock Exchange chief executive David Schwimmer raised the collapse in domestic funds investing in British companies when asked his reaction to Arm’s move to New York, saying the switch out of equities raised some ‘really interesting questions’.

It certainly does, and it would be interesting to learn more from the American Schwimmer on how this can be changed.

It’s not for the lack of capital: the UK has the second biggest pool of long-term capital in the world after the US. It’s only by tempting those pension funds into backing British companies again that the City has any hope of creating a healthier climate for growth and innovation, and show companies such as Arm why they should choose London – as well as New York. (Authorities on both sides of the Atlantic should also look at changing the rules to make dual listings easier and cheaper).

Persuading pension funds to fall in love again with equities will be harder than the falling out: it always is. It will require serious thought – and big structural change – by the industry, working together with the authorities. But admitting there is a problem is a good starting point.

There is another issue: the ease with which successive governments have given the thumbs-up to overseas bidders taking out British companies on the cheap.

SoftBank’s original takeover of Arm in 2016, and the more recent bid by Schneider Electric for electronics firm, Aveva, come to mind. Which is why it is so ironic to hear former chancellor, Philip Hammond, lament that London has become a less attractive venue because of listing criteria and lack of deep pools of capital.

It was under Theresa May and Hammond that the Arm bid was waved through despite a huge outcry, intense lobbying by the founder and fears over security.

How short-sighted and what hypocrisy!