£50bn sounds good, Mr Hunt, but it’s small change when there’s trillions of trapped assets available

Knowledge Base
Thursday, August 03, 2023

Author: Stuart Lucas

I’ve always thought that a great ‘end of life’ investment might be to bet everything you have that there is an afterlife. If there isn’t one then presumably you’re not around to pay up and settle the bet? This thought has resurfaced recently following a number of pronouncements from our current government, none more so than the measures announced to create liquidity for high-growth businesses  in the Chancellor’s well received Mansion House Speech

Mr Hunt’s “Mansion House Compact” has committed many of the nation’s largest defined-contribution (DC) pension schemes, around two thirds of the market, to allocating at least 5% of their default funds to unlisted equities by 2030 and asked the rest of the DC market to follow suit. A move that could, according to Mr Hunt, unlock up to £50 billion of investment into high growth companies by that time.

This is capital the economy undoubtedly needs but as an exercise in releasing liquidity, there are more obvious and ambitious routes to facilitate the recycling of locked in cash. E.g. the £1.7 trillion of assets held by occupational direct-benefit (DB) pension schemes. If you allowed just 5% of those assets to be liquidated by their shareholders, you would open up almost double the £50bn target in the Mansion House speech.  Some gentle changes to the Companies Act and maybe Articles of Association could facilitate regular bouts of liquidity that benefit a company’s shareholders.

Also, as with any of this government’s latest pronouncements, there’s a rather large elephant in the room. That is, if the polls and recent by-election results are to be believed, the conservatives are set for a spell in opposition. Party sources essentially admitting this week to a general election strategy of damage limitation only confirmed my suspicions: the government, whether they know it or not, is making an end of life investment and doesn’t plan to settle the bet. They could be accused of kicking the can down the road.  

It was a similar story with last month’s call for evidence on employee shares. Employee ownership is a great thing but it means nothing without the ability to easily realise the value of shares. With companies staying private for longer than ever and often refusing to offer regular equity events, cash remains trapped. They become a blunt perk or a pair of golden handcuffs. And again, is this not just the beginning of a lengthy process that is likely to end up in the lap of the next government? For context, the Department for Work and Pensions has only just published its response to its 2018 consultation on consolidation for DB schemes. There’s still no policy in sight. 

This doesn’t need to be the case. There are plenty of ways to increase liquidity in private and unlisted shares, and with a majority of over 60, Mr Sunak and Mr Hunt have the power and the time to implement them. This should begin with two key changes. 

The first is a mild adjustment to the Companies Act instructing companies to orchestrate an equity event within seven years. The crowd funding vintages of 2012-2018 all promised exits in three to five years via an AIM IPO or a trade sale after all and I’m seeing many of today’s startups promise the same – so that shouldn’t be a problem. 

The second change would be to the Enterprise Investment Scheme (EIS). Currently investors can claim 30% of their investment as long as they hold their shares for up to three years. Instead, why not offer 10% for the first three years and allow shareholders to sell after one year or two and forgo the other 20% or 10%? 

See, cash has to be recycled. This is important for the economy as freed up capital can be recycled back into the investment cycle, but it can also be a vital lifeline for retail investors and employee shareholders. I’ve seen this first hand. When it was announced that UK energy bills could be surging to as much as £5,000 a year, we saw a number of users on the Asset Match platform look to cash in a similar amount of shares. In response, following Tottenham Hotspur and Brewdog auctions on the platform, we had a number of very happy people calling us up after selling their shares. 

Though the current government may not be around to see the benefits, implementing these solutions could release much needed liquidity into the economy and provide the electorate with an innovative and impactful parting gift. 

It’s time for Mr Hunt to stop making bets on the afterlife and focus on the here and now.