TheTreasurer

FCA reviews UK markets’ effectiveness for science and tech

Regulator explores whether provision of scale-up and ‘patient’ capital to the UK’s most innovative firms lacks clarity and focus

UK capital markets may not be working effectively enough for the science and technology sectors, according to a new discussion paper from the Financial Conduct Authority (FCA).

In a wide-ranging document requesting input towards a more general review of UK markets, the regulator devotes a whole chapter to the question of whether science and technology enterprises are left particularly short-changed by the current system.

On the evidence of stakeholder comments that fed into the drafting of the paper, it emerged that the UK’s primary equity markets may lack the clarity and focus required to support the scale-up and long-term goals of the country’s most innovative businesses.

As the paper points out, those markets currently comprise a variety of avenues, including:

  • the Main Market (containing the High Growth Segment and the Specialist Fund Market, among others);
  • Euronext London;
  • AIM;
  • the NEX Exchange Main Board; and
  • the NEX Exchange Growth Market.

Each of those, the FCA says, offers a route to market for issuers from different sectors, or at different points in their life cycles.

“However,” it notes, “we have increasingly heard concerns that our primary equity markets are proving less effective at performing what many think should be their central role.

“For instance, there is a considerable body of market commentary suggesting that initial public offerings are now largely a vehicle for existing shareholders to exit their investments, rather than a means for companies to raise capital for further growth and development.”

A related concern, according to the regulator, is that companies that would once have accessed the primary capital markets at an earlier stage in their development are now staying private for longer.

“Life sciences companies,” it says, “were specifically mentioned in this context – given there is often a relatively long period between start-up, and the business producing commercially viable products. These concerns were stated by a number of stakeholders.”

On the question of scale-up capital – which a firm would typically obtain once it has established a sound operating history, to spur and consolidate growth – the paper says: “We are aware that the average size of later-stage venture capital deals in the US is significantly larger than those in the UK, suggesting a potential gap in late-stage venture capital funding.

“Separately, it appears that UK technology companies are disproportionately the subject of M&A activity compared with their international peers.”

A number of stakeholders also took the view that the UK’s primary equity markets may be ineffective in providing so-called ‘patient’ capital – in other words, investment based upon long-term plans.

As the regulator notes: “The past 10 years have seen significant changes in the UK’s secondary capital markets, with a marked shift towards algorithmic trading strategies and the separation of primary from secondary markets.

“A market structure dominated by a single venue, on which substantially all primary and secondary market activity takes place, has been transformed by fragmentation of secondary (and to a lesser degree primary) markets across a number of competing venues.”

Some commentators, the paper adds, “maintain that those structural changes have resulted in secondary market activity being increasingly characterised by short-term trading rather than long-term investment considerations.”

The consultation closes on 14 May.

Read the full paper here.

Find out how to respond here.

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