Mr Livingstone warns domestic investors have “all but given up” on supporting British businesses. Photo: JULIAN SIMMONDS
One of Britain's most senior bankers has warned that the country's capital markets are in crisis as domestic investors have «all but given up» on supporting British businesses.
David Livingstone, who runs Citi's operations in Europe, the Middle East and Africa, said the UK was increasingly reliant on foreign money to finance its business and infrastructure.
At the same time, he expressed alarm that more and more companies are leaving the UK to seek funding abroad.
The dynamics are decreasing. He warned that UK capital markets and risks would leave pensioners who rely on investments for retirement income poorer in the long term.
Mr Livingstone spoke as think tank New Financial warned that the British stock market risks falling into a «doom loop».
Years of «well-intentioned regulatory reform» have been undermined by the city's risky approach, a new report says. As a result, the number of companies registered in the UK has «almost halved in 25 years», with companies also raising less money.
The amount raised from new businesses entering the market last year was the lowest . since 1980 in real terms.
2305 UK pension fund allocation
Mr Livingstone expressed alarm at Britain's growing dependence «on foreign investors for capital growth and funding critical infrastructure.»
At the same time, new innovative enterprises are fleeing the country en masse. He said: “The likelihood that UK-based growth companies, their employees and supply chains will migrate overseas to access capital is greater.”
Mr Livingstone described the situation as a “crisis.”
Mr Livingstone described the situation as a “crisis.”
p>< p>William Wright, managing director of New Financial, said: “Despite highly developed capital markets and deep pools of long-term assets, the UK stock market has stagnated over the past decade; Growing UK companies are increasingly reliant on overseas investors; and the UK has some of the lowest rates of investment, productivity and economic growth of any country.»
It comes as yet another company has struck a deal to exit the London stock market.
Aim-listed pharmaceutical business Ergomed has agreed a £703m takeover by private equity firm Permira.
John Dawson, Ergomed's senior independent director, said that while Ergomed expects to deliver «significant long-term shareholder value», the next stage of its growth will require investment in expansion, technology upgrades and the financing of «transformational» acquisitions.
2006 UK less attractive than the rest of the G7 countries
Paul Marshall, chairman of Marshall Wace, previously blamed UK income funds for the decline of the London stock market. He accused managers of prioritizing «dividends over any other type of profit,» forcing companies to pay out «the lion's share of their earnings rather than invest them back into the business.»
Concerns about relative competition The London stock market has reached a fever pitch this year after Irish construction firm CRH decided to move its listing to New York and Cambridge chipmaker Arm decided to list in the US rather than the UK.
The New Financial report warns there is a risk of «a self-fulfilling doom loop of disinvestment, weaker demand from domestic investors and lower valuations.»
The think tank said that «the UK is well positioned to build.» building blocks to develop bigger and better capital markets,” but needed a clearer strategy.
The Ergomed takeover is the latest in a string of private equity deals involving listed UK healthcare companies. In June, private equity firm EQT completed a £4.5 billion takeover of veterinary drugs maker Dechra Pharmaceuticals, and last week it announced the sale of life sciences software maker Instem to Archimed for £203 million.
Max Herrmann, an analyst at Stifel Healthcare, said the deal was «another example of how the UK market is proving a rich environment» for private equity firms seeking a bargain.
Britain must take risks to boost economic dynamism< p>By David Livingstone
The UK has the world's second largest pool of long-term capital, with almost £5 trillion held in pensions and insurance funds.
Despite the long-term nature of this capital, the amount that domestic investors have invested in shares and individual UK companies has fallen sharply over the past 25 years. It's a double tragedy, or what a new think tank report calls «parallel crises».
In UK Capital Markets: A New Sense of Urgency, sponsored by Citi and abrdn, think tank New Financial argues that The UK pension system is in crisis due to excessive fragmentation, low contributions, insufficient exposure to long-term and high-yield risks and growth assets and widely varying participation levels.
A second and related crisis occurred in the capital markets. Many UK investors have all but given up investing in the UK's productive assets, leaving the country dependent on overseas investors for capital growth and critical infrastructure funding, while denying future generations of retirees higher incomes.
There is also a higher likelihood of growing UK-based companies, their employees and supply chains migrating overseas to access capital.
This situation comes at a cost to all of us who live and work in the UK .
Extrapolating from OECD data, a typical UK pension fund could be worth £140,000 in today's money in 35 years' time, assuming a real rate of return of 4% and annual income/contribution growth of 3%.
1,504 UK pension funds were the worst performers. rivals
In Canada, the same bank would cost £176,000, given the country's superior pension fund performance. In Australia the amount would be even higher — 186 thousand pounds. This means that, according to some estimates, poor performance could leave UK savers with £45,000 less in their pension pots than their Australian counterparts.
The problems of UK capital markets and pension investing are complex and decades in the making. , and the UK Government should be commended for the energy and attention it is putting into tackling this long-standing problem.
In developing policies to create new incentives to invest in the companies of the future — the next Arm Holdings or the biotech firm to treat previously terminal illnesses – the UK needs to adopt an appropriate balance of risk to ensure inflation-beating returns by encouraging diversification of pension assets at scale.
Perhaps the biggest opportunity lies in defined contribution schemes, the UK's largest pool of pension assets, the majority of which are currently active. There are over 3,000 defined contribution schemes in the UK with total assets of around £600 billion, or £200 million each.
In Australia, by contrast, there are about 120 “super” schemes with assets of around £10 billion each. Scheme consolidation increases the ability to take on properly managed and diversified risk, which improves returns over time.
There are also over 5,000 defined benefit schemes in the UK, 75% of which have assets of less than £100 million, too small to achieve economies of scale and portfolio diversification for large-scale investment in UK shares.
The UK's superfund regime is currently stuck on the starting grid. The government should strengthen incentives for corporate sponsors to move fully funded schemes into the new “super funds” that have seen success in Australia, Canada and other countries. The UK's super fund regime is currently stalled.
Finally, we could kick-start a new era of retail investment by creating a 'baby growth fund' for every newborn.
I believe that this will significantly increase the nation's financial literacy and participation in equity investing, a valuable goal in itself. Investing, say, £3,000 per child over 30 years would attract more than £200 billion of risk capital to fund the high-growth companies of the future.
The scale of the challenge is significant, but the opportunity is enormous. We hope this topic remains at the top of the agenda and urge the Chancellor to be bold in his autumn statement.
David Livingstone is Citi's chief executive for Europe, the Middle East and Africa
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