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The UK’s public markets are broken, but private companies need better market structure

by Jessica Weisman-Pitts
iStock 1277435759

The UK’s public markets are broken, but private companies need better market structure

By Cees Vermaas, CEO of The International Stock Exchange, which offers TISE Private Markets

In Europe and the UK, public markets and IPOs saw a dramatic decline last year. The number of IPOs was down, and the money raised on those IPOs is down. Many of the flagship IPOs that took place performed poorly post-listing. The trend towards private markets is clear, companies are choosing to stay private for longer. As a result, more value is generated while the company remains private.

UK financial markets in particular are changing and the trend is even more clear here. Over the last 10 years, the UK economy has added 4,714 private companies with 100 or more employees, while the number of listed companies has reduced by 275. The UK now has 19,148 privately owned companies with over 100 employees. This is 16 times the size of the listed market, 1,262 companies, which includes nearly 500 companies on AIM and Aquis, many of which suffer from low liquidity and high listing costs. 2023 was the slowest UK IPO market in more than a decade and the liquidity pool in London has shrunk.

There were also a number of public-to-private deals in the UK. This trend of de-equitisation looks set not only to continue in London this coming year but to gather pace. Low valuations make the UK an attractive hunting ground for acquirors and private firms will look to take advantage of lacklustre valuations and the flow of money away from London’s public markets. UK listed companies continue to look undervalued and we can expect further take privates this year with firms listed on AIM and Aquis looking particularly susceptible to bids.

It is clear that public markets are not able to serve a huge cohort of the British economy as they should be. A public listing is expensive, it can cost up to anywhere from 200k-£1m when all costs have been factored in, even on a junior market, and besides, it raises operational costs such as recurring listing fees, broker fees and fees for auditors. For valuation and trading, most exchanges are exploiting broker models, which does not enhance liquidity for small and medium enterprises. It is obvious that costs and liquidity are huge issues for these companies, who just want to have focus on running and growing their businesses.

Private companies are the lifeblood of the British economy. They provide the bulk of goods and services we all use, create most of the employment, and generate tax revenues and export overseas. However, their ability to access capital is still hindered by the cumbersome, almost Dickensian, processes that come with buying and selling shares in private companies. It’s unreliable, drawn out, expensive and uncertain. Typically, a private company shareholder would need to initiate contact with the company, which is then tasked with identifying potential buyers or sellers of the shares. This alone can take weeks, or even months, adding complexity and hindrance to a transaction that could otherwise be swift and efficient.

What’s clear is that private markets need a solution for liquidity to achieve the desired recycling of money into new investments. How about… a secondary market for private companies and investors to access liquidity events without the volatility of listing on the main markets? Somewhere early shareholders and VC and PE funds can find exit opportunities? Where new institutional investors can gain access to companies they might not be able to otherwise? Where employees can access liquidity in their shares? Where investors can recycle their capital having the certainty of periodic liquidity events? Sign me up.

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