Wednesday, December 20, 2023
Author: Stuart Lucas
On the face of it, 2023’s primary private markets narrative was one of declining growth and an abject lack of liquidity (with many people who should know better sounding the alarm over what we see as standard market movement). For us, however, the real story of the last 12 months has been a ground swell further down the private market pyramid towards a new way of approaching private company ownership. Not only has delisting become more common, but the current UK Government and the decision makers at the LSE have all been, in their own way, making the right noises when it comes to the shake up the market so desperately requires.
However, those noises have been made quietly and with little evidence that any changes will happen before next year’s likely General Election. In 2024, we want to see action. The foundations have been laid, it’s time for transformational structural change.
With all that in mind, we’ve put together a Christmas wish list of the five things we think need to happen in 2024 to build on 2023’s good work.
What we want to see in 2024
1. Increased valuation and transparency
We welcomed the news in September that the FCA was preparing a review of private market valuations. As December draws to a close, however, there’s been little else said about these plans despite reports the review would be kicking off by the end of the year.
Private market valuations have always been more art than science, but, as I’ve said before, the current landscape is more finger painting than Monet. The wild valuations we saw following the pandemic have created a strange situation where the prices entrepreneurs expect are world’s away from what most investors are willing to pay.
We believe that companies should state their estimated share price in their accounts and audits, perhaps following the 'going concern' statement. To aid this, there are firms that provide solid valuation work with the cost of such a valuation being a fraction of the annual costs of an AIM listing. This is also where Asset Match can help, our periodic auctions use an algorithm to find a fair and reasonable valuation for a share.
But, to make that sort of transparency the norm rather than the exception, regulatory changes are required too.
2. A New Companies Act
In 2009, following the 2008 financial crash, it felt strange that UK business was still largely governed by a Companies Act that was written in 2006. Fast forward to the final weeks of 2023 and the same regulation remains. This is wild when you consider how much private markets have changed in the last two years, never mind the last eighteen.
Changes to the regulation can not only help with the lack of transparency around valuations, but give the UK the push it needs to get back on the front foot in the global economy.
Therefore, there are three key changes we would like to see:
- Companies should state their estimated share price in their accounts and audits, perhaps following the 'going concern' statement and provide a share price for each share class.
- The Act should recognize that shares traded between willing buyers and sellers often come with an illiquidity discount, which should be deemed appropriate by the buyer.
- Finally, after a certain period, there should be a guaranteed equity event. Many factors can prompt a shareholder to want to cash in and these should not be disregarded on the whim of a Board.
The UK Government talks often about backing startups and growth businesses, an aspiration it has not quite achieved. A regulatory framework that encourages small company liquidity could be a real differentiator for UK PLC.
3. Changes to the Enterprise Investment Scheme (EIS) to drive the recycling of capital
The aforementioned changes to the Companies Act can, we believe, help unlock the trillions of pounds of trapped liquidity in the UK economy. This would be greatly assisted by changes to the 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%?
That freed up capital can then be recycled back into the investment cycle, while also providing extra cash for retail investors and employee shareholders to pump back into the economy.
4. The delisting revolution must continue
The number of AIM listed companies is down nearly 60% since its 2007 peak, with many small to medium size companies starting to understand that staying publicly listed is no longer the best option. Today, exchanges like AIM can serve as a source of initial liquidity by providing access to capital – but come a distant second to larger markets in terms of daily volumes. To put it bluntly, the long term liquidity simply isn’t there anymore.
That’s before you even consider the costs. An initial IPO on AIM will likely cost a minimum of £500,000, while core running costs tend to be a minimum of £200,000 per year, once you factor in RNS announcements and legal costs, as well as Nomad (Nominated Adviser), broker and exchange fees. Not to mention the cost of 6-12 months of senior management being distracted in the run up to the float.
Trading on Asset Match offers superior liquidity, lower costs and a compliance level that’s more appropriate and less onerous on the management team.. Furthermore, we can provide companies and their shareholders accurate and fair share pricing driven by market forces measured over time. It’s no wonder we’re speaking to companies every day that want to delist.
5. An LSE Intermittent Trading Venue (ITV)
As we wrote last month, upon first reading about the London Stock Exchange’s (LSE) plans for an ITV, my first thought was “this sounds awfully familiar”. My second was: “it’s about time.”
An ITV is simply an exchange that allows the buying and selling of company shares for a pre-ordained time – unlike public markets such as the LSE or its growth arm, AIM, which provide ‘daily liquidity’. ITVs can be particularly useful for small to medium growth companies, especially in times like these where the overall IPO market is down, leaving founders and initial shareholders unable to cash in. It also facilitates the recycling of cash – especially considering the illiquidity discount (30% to 50% by our estimates) it offers buyers – back into the market, bolstering sentiment. With cash in short supply, it’s no surprise the Government is so keen on the idea.
In 2024, we would love to see the LSE make good on their promise. And if they would like a bit of advice, we’re only a phone call away.
Afterall, we know how impactful an ITV can be for releasing trapped liquidity. We’ve been running one for 12 years and completed over 800 auctions.
Merry Christmas and Happy New Year from everyone at Asset Match
Closer to home, it’s been a big year for Asset Match too and this wider shift in sentiment within the private markets is being reflected in the growing and diverse list of companies using our platform. This year, global brands like Brewdog and Tottenham Hotspur were joined by renowned companies such as Adnams, Marshall of Cambridge and Wadworth, to name a few. And on average, we’re facilitating around £1.1m of secondary transactions every single month, bringing much needed liquidity in the unquoted space as well as transparency around price discovery.
For many, Christmas can be a quiet time, but for us, with many companies looking to delist in time for the New Year, we’ve got a busy few weeks ahead before a short but well deserved break.
Here’s hoping that 2024 brings us everything on our wish list and yours, and from everyone here at Asset Match, have a Merry Christmas and a Happy New Year.