Academics and politicians have long scratched their heads over the difficulty of finding enough sources of long-dated capital to meet the funding needs of the wider economy. The Macmillan Committee, with Maynard Keynes and Ernest Bevin among its members, found in 1931 that, while the UK’s infrastructure for providing short-term and intermediate credit was adequate, there was a gap in the provision of long-dated capital. To fill the ‘Macmillan gap’, the committee suggested a new institution sponsored by the joint stock banks, eventually inspiring the creation of the Industrial and Commercial Finance Corporation, a precursor of 3i.

The Future of Growth Capital, a report released in August 2020 by the ScaleUp Institute, Innovate Finance and Deloitte, estimated the UK’s long-term structural growth capital deficit at £5bn to £10bn a year. It said this was across the spectrum of growing businesses: around £700m at the seed capital stage, another £700m at the venture stage, around £3bn for businesses in the growth stage and a further £3.2bn growth capital requirement for established businesses.

Yet public equity markets, in the UK as elsewhere in Europe and the US, have been in secular decline for some time. In Asia, stock markets such as those in Hong Kong, Tokyo and Singapore have seen substantial increases in the number of listed companies over the past 20 years. In the US, by contrast, the number of listed firms halved from 8,090 at the peak in 1996 to only 4,397 by the end of 2016, according to World Bank data. In the UK, the trend has been similar. The total number peaked in 2006 at 2,913, and has slipped steadily since then to 1,989 at the end of 2020. On the London Stock Exchange main market, the peak came earlier and the downward trend has been in place longer.

• Free float requirements. For the main market, current UK listing rules require 25% of a company’s shares to be available.
• Dual class share structures. Founder shareholders in some countries have favoured these, and wider permission to use them might encourage more fast-growing companies to list.
• Track record requirements. Premium listing in London requires a three-year track record of earning revenue, underpinned by a profitable and sustainable business model.
• Prospectuses. UK rules are aligned to the existing EU requirements, where a prospectus is required when raising more than €8m, or when offering securities to more than 150 non-qualified investors. The review’s initial call for evidence suggests that may not be well calibrated for UK markets, or useful for follow-on issuance.
• Dual and secondary listing. The UK’s ‘standard’ listing segment is more geared towards secondary listings, but requirements for premium listing may deter companies listed elsewhere from seeking a secondary listing in London.

Despite the difficulties presented both by the markets and the pandemic, UK equity markets were functioning in 2020. The Bank of England’s Financial Stability Report of December 2020 found that larger companies had tended to repay bank debt, but had raised equity and bond finance.

“UK businesses’ cumulative net equity issuance in the year to October [2020] was over £18bn – compared to negative cumulative net issuance on average for the same period between 2016 and 2019,” the report noted. Given that, as the report points out, longer-term bond yields have fallen substantially since 2014, the interest in equity issuance might seem anomalous. Debt is cheaper than equity – partly because equity investors expect to be compensated for the extra risk they take and partly because debt attracts tax breaks. But equity, unlike debt, does not need to be paid back and dividend payments can be put on hold. Debt interest payments, in contrast, are harder to avoid. Equity also allows a company to demonstrate that it has a strong balance sheet.