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Public markets have shown their worth during the crisis, we need to sustain them

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Public markets have shown their worth during the crisis, we need to sustain them 1

By Stuart Andrews, Managing Director at UK financial services firm and broker finnCap

Despite their many detractors, the public markets have proved their worth for both corporates and investors alike since the pandemic struck, with up to £16bn so far being raised in the UK. Nevertheless, the fact remains that the number of quoted companies has dwindled, we have seen limited numbers of IPOs and the general liquidity pool is slowly evaporating for growth companies. While the reasons are many, government tax policies and regulations designed to protect investors are key areas that have contributed to this – but there is a way to address these concerns and it is now time to do so as public markets are critical for funding growth.

Public markets on the wane?

Given the amount of column space devoted to the decline of publicly listed companies, you could be forgiven for believing that the public markets were now redundant and listed status a quirk of an evolving capitalist system. This is particularly true of the smaller end of the market where growth companies are largely unnoticed by the mainstream press unless there is a corporate mishap. We often hear about declining volumes of shares traded and the availability of vast amounts of private capital, while the statistics that between 1996 and 2016 the number of listed companies in the United States fell from 7,300 to just 3,600 or that AIM has fallen from 1650 to 863 companies between 2007 and 2020 seem to be wielded at will.

The last few months should prompt a serious rethink of this overarching narrative. Many companies have had a pressing need to raise capital given such dire economic conditions, and those that are publicly listed have been able to do so, accessing more capital, more quickly, than has proved possible in the private market. It is not an exaggeration that, for many, being publicly listed has represented a real competitive advantage. And it is not just companies in distress who have benefited, those looking for funds to develop Covid-19 related products, or who are strengthening balance sheets to capitalise on future opportunities have done so as well.

Benefits for investors, both institutional and retail

Alongside corporates benefiting from public markets, investors are granted access to liquidity and transparent pricing which allows capital to be released for new issuance and deployed effectively whenever opportunities arise. Investors also benefit from levels of disclosure and protection enshrined in UK law or in the rules of the exchange that ensure that the pricing of liquidity is fair to all concerned. And strikingly, it has not only been institutional investors who have been keen to invest: in recent weeks retail investors have represented over 20% of the volume on the FTSE All-Share, with 60-74% of this being buy orders. UK stockbroking platforms are also reporting over threefold increases in new account openings.

Tax policies and regulation inhibit growth companies – plotting a path forward

So why, despite the benefits of public markets to raising capital and investing, are we not seeing more IPOs and greater liquidity in growth companies? It is a complex area, but government tax policies and regulations designed to protect investors are both combining to make the public markets not as easy as they should be for smaller companies and investors alike.

Change is needed to make companies consider turning to public markets first, and to reverse the fact that more companies are leaving public markets than joining.

Capital structure ownership – limit the amount of interest that is tax deductible

Stuart Andrews

Stuart Andrews

Given that interest is tax-deductible, private equity that owns the whole capital structure is at an advantage compared to a passive equity investor that only owns the equity and therefore has less appetite for leverage. The effect of this is to lower the cost of capital to private equity, allowing much higher valuations for businesses ideally suited to the public markets. There should therefore be a rethink of this tax benefit to limit the amount of interest that is tax deductible, so costs of capital are more comparable.

Review regulation that results in the need for larger funds

As regulation has grown, funds have had to become larger to be run profitably, leading to industry consolidation and larger portfolios. Additionally, private client funds are increasingly run on a model portfolio, which also increases the unit size of these funds and limits discretion.  A fund can only sustain a limited number of positions, and so the larger the fund, the larger the companies in which it must invest. Savings are therefore increasingly exposed to the same pool of larger companies, which is a disservice to the underlying clients. Hence by reviewing regulation for institutional fund managers and retail investors, the overall market could benefit – with the risk profile for the individual retail client remaining unchanged.

Democratise access to research and corporates

A key contributor to market liquidity is the private individual. Yet, ironically, they are being increasingly locked out of public markets by regulations designed to protect them. This locks them into exposure to large corporates or execution-only accounts and penalises companies that do deal with them. The City of London therefore revolves around institutional stockbrokers that act on behalf of corporates but are reluctant to deal with retail clients, putting individuals at a disadvantage when it comes to research and corporate access. It is why initiatives such as PrimaryBid and Investor Meet Company are important – they help level this playing field and create equal access to all market participants.

Raise Prospectus Regulation limit

Finally, a significant bottleneck on liquidity is that it is not currently possible to include private investors in fundraises to a quantum higher than €8m without producing a time-consuming prospectus. Issuance is therefore increasingly spread over limited institutions while pre-emption rights have largely been eradicated. Little investor detriment seems to have come from increasing the Prospectus Regulation limit from €2m to €8m, so it is time to consider increasing this again to €20m. Indeed, after Brexit, this decision will rest in the hands of the UK Government and can be denominated in Pound Sterling.

Conclusion

Getting tax policy and regulatory oversight right is a tricky, but necessary, balancing act. Yet, as it stands, some are acting to the detriment of growth companies and investors on public markets that have truly shown their worth during the pandemic. It’s time for a rethink so the growth companies that will drive the recovery get the funding they need.

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Reuters Events Launch Global Investment Summit Online Edition Uniting Institutional Investors, Asset Owners & Financial Institutions

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Reuters Events – today announced the agenda for their Global Investment Summit (Dec 3rd -4th). The 2-day strategic summit has been reimagined in the era of social distancing and will be broadcast free of charge to the public.

This Summit, with a diverse range of international voices and anchored by Reuters News-led sessions, is the only place for institutional investors, asset owners and financial institutions to come to terms with the events of 2020.

Click for more information and for complimentary registration to the online edition

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Eileen Murray, Chair, Finra
  • Philip Lane, Chief Economist, European Central Bank
  • Gregory Davis, Chief Investment Officer, Vanguard
  • Hanneke Smits, CEO, BNY Mellon Investment Management
  • Pascal Blanque, Chief Investment Officer, Amundi
  • Desiree Fixler, Group Chief Sustainability Officer, DWS
  • Joe Lubin, CEO, Consensys
  • Bahren Shaari, CEO, Bank of Singapore
  • Mark Machin, CEO, Canada Pension Plan Investment Board

The agenda released by Reuters Events Investment is both ambitious and comprehensive, and will cover four key themes: Market Outlook, Asset Management Strategies, Industry Deep-Dives and the Future of Investment.

View the full agenda here

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Halliburton & Baker Hughes CEO’s join Reuters Events: Energy Transition 2020

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Reuters Events – today announced that CEO’s of two of the world’s leading energy service companies, Halliburton and Baker Hughes, will join the speaker faculties for their flagship Energy Transition Summit.

The event will explore the creation of the future energy ecosystem and offer companies, from across the asset spectrum, a definitive guide to their net-zero strategies. The alignment of the two biggest O&G global service companies, Halliburton and Baker Hughes, represents a significant step in the transition to low-carbon energy

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Alongside their CEO speaker representation, Halliburton join as Platinum sponsors of the North American edition. Baker Hughes join as gold sponsors for the European edition of the flagship energy transition program.

The Energy Transition team report an industry leading speaker faculty for 2020, including:

  • Lorenzo Simonelli, Chairman & CEO, Baker Hughes
  • Jeff Miller, CEO & President, Jeff Miller
  • Tristan Grimbert, CEO, EDF Renewables
  • John Pettigrew, Chief Executive, National Grid
  • Pratima Rangarajan, CEO, OGCI Climate Investments
  • Alex Schneiter, CEO & President, Lundin Energy
  • Gretchen Watkins, President, Shell Oil Company
  • Calvin Butler Jr., CEO, Exelon Utilities
  • Francis Fannon, Assistant Secretary ERB, S. Department of State
  • David Lawler, Chairman & President, bp America
  • Andreas Schierenbeck, CEO, Uniper

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

Governance & Cooperation – Does the energy transition face a ‘governance deficit’? To understand how the energy transition will develop over the next decade, it is crucial to understand the driving governing forces behind it. Will the Green Deal provide the first domino, how can we ensure progress in the shadow of Aberdeen and ensure that we translate targets into action?

Financing Energy Transition – We must address the elephant in the room; who is going to pay for it all? An understanding of where the funds are likely to come from is key to staking claim to the infrastructural projects that will redefine the modern world in the 21st century.

New Energy Infrastructure – Low-carbon energy supply and consumption will need a radical overhaul of infrastructure. As well as revamping the old, we’ll need entirely new assets and new systems of energy delivery. It’s an unprecedented opportunity with estimated spending at $70 trillion over the next decade. Knowing which technologies are ready to be scaled first is the key to understanding opportunity

Business Model Innovation – Who will provide leadership through the age of transition and how do we want our future energy system to look? Speed and timing will be crucial if you are to stay on the right side of the transition. Join us in setting business led, evidence based, targets as industry drives towards net-zero

More information on the Europe and North America editions can be found below. Registration for the LIVE stream is free.

At Reuters Events, we’re committed to tackling the Energy Transition head on; to shed light on the defining issue of our time and help energy companies meet a uniquely difficult challenge. That is, to be both an energy company of today, and the energy companies of tomorrow. In a period that will be defined by uncertainty we can, together, lighten the way forward.” – Owen Rolt, Head of Energy Transition, Reuters Events

Contact

Owen Rolt

Head of Energy Transition

Reuters Events

UK: +44 (0) 207 375 7596

E: [email protected]

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COVID-19 is changing people’s preferences when it comes to BTL investments

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COVID-19 is changing people’s preferences when it comes to BTL investments 2

By Jamie Johnson, CEO of FJP Investment

Throughout 2020, investors have had to navigate increasingly treacherous and volatile market conditions as a consequence of the COVID-19 pandemic. No country has been immune to the coronavirus outbreak, particularly here in the UK.

Yet even as the country enters another phased lockdown of sorts, demand for UK property has remained strong. After a brief period of suppressed demand after initial lockdown measures were introduced in late March, the UK’s implementation of the stamp duty land tax (SDLT) holiday triggered a rush in demand for bricks and mortar. As a result, both house prices and transactional activity is rising.

With this new surge in demand resulting in an 18-year-high of UK house price growth, according to the Royal Institute of Charted Surveyors, buy-to-let (BTL) investments have also substantially increased in popularity.

It’s easy to understand why. BTL investments offer landlords both long-term capital growth and regular returns in the form of rental payments. And now, as the SDLT holiday deadline beckons closer, investors keen on taking advantage of the comparative discounts on offer must act quickly.

My advice to those considering a BTL investment in the UK is to understand and appreciate the longstanding market changes that have been brought about by COVID-19. Traditional BTL hotspots are being challenged by a rise in tenant demand for real estate in up-and-coming cities and regions.

For example, the COVID-19 pandemic has resulted in the majority of the workforce working remotely from home. Recent data from property listing site Rightmove makes clear the shift in demand away from central London and towards less densely populated regions; with areas like Cambridge and Oxford seeing 76% and 64% more rental searches respectively and searches in areas like Earl’s Court dropping by 40%.

This is the clear result of previously London-based professionals realising the benefits of working from home. As businesses identify the financial drawbacks and COVID contagion risks of having all their staff physically present five days a week, employers will seek out smaller commercial workspaces.

At the same time, we are also seeing workers looking to rent larger, cheaper properties that might be further away from their office. This is due to the fact that they are unlikely to need to commute every working day to their office, even once the COVID-19 outbreak has been contained.

But, where exactly are the best larger, cheaper properties to be found? Where are the UK’s emerging BTL hotspots that need to be on the radar of prospective investors? I explore these pertinent questions below.

Liverpool life

Those who have been closely following the UK’s housing market will know just how primed Liverpool is for BTL investment. As a key recipient of the UK Government’s Northern Powerhouse funding, and with massive developments like Liverpool Waters and Wirral Waters soon to be completed, the city’s housing supply is ready to meet the demands of those taking part in the aforementioned London professional exodus.

With Liverpool constantly ranking No.1 in rankings of UK cities for BTL investment, it’s evident why investors would be keen on completing purchases of Liverpool property before the end of the SDLT holiday. Though even after the SDLT holiday ends, there’re still plenty of reasons to be optimistic about Liverpudlian BTL investment. Prime Minister Boris Johnson’s government is firmly committed to ‘levelling up’ the North of England through regional regeneration, and planned high speed rail connections between Liverpool and other northern cities will only add to the investment potential of the city.

Leeds living

Although Liverpool boasts the highest rental yields for BTL landlords in real terms, Leeds was recently named the most profitable city to become a landlord in the whole of the UK by CIA landlord. By evaluating numerous metrics; including mortgage costs, average rent, average monthly landlord costs and average property prices, they determined that Leeds was the best city for potential buyers to make their first foray into BTL investment.

And, looking at recent trends, it’s easy to see why. Leeds may benefit more from the London exodus than other cities due to its unique position of being a brain gain city’, i.e. one where more students remain after graduation than move away. As a result, it boasts the largest financial services sector in the nation after London, making it an ideal locale for employers in the financial services sector who are seeking cheaper commercial rent outside of London; likely bringing investment and employees with them.

With its strong urban economy likely to be bolstered by its designation as a ‘Northern Powerhouse’ leading business hub, Leeds is ideally positioned for BTL investment over the long-term.

Cardiff’s regeneration

And finally, the capital of Wales brings much to the table when deciding between different BTL investment destinations. With a metropolitan area population of over 1.1 million residents, forecasted to grow by 20% by 2035, demand for property in the city is set to rapidly increase over the next decade. Those able to capitalise on this population growth will be able to access considerable long-term investment opportunities – as recent reports suggest.

Thankfully, it’s unlikely that there’ll be any shortage of housing supply in Cardiff for BTL investors to invest in. Cardiff Bay has emerged as Europe’s largest waterfront development, and the upcoming Central Quay and £500m coastal developments will assist in attracting further investment into the city.

BTL remains a sound investment opportunity

COVID-19 has made evident just how resilient British real estate is as an investment asset. By offering the best of both worlds, namely long-term capital growth and regular rental returns, BTL has successfully remained an attractive and popular investment choice. And, with demand for housing still outstripping supply, the market need for rental accommodation looks set to only grow.

COVID-19 has permanently changed the UK’s housing market and, as explained above, new BTL hotspots are surely due to emerge over the next year. With renters seeking out larger homes in cheaper areas, flexible working patterns will forever change the landscape of the UK’s residential real estate market, and those able to capitalise on it may benefit hugely as a result.

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