Pisces: fishing in a shrinking pond

A new share exchange system, Pisces, is being launched by the Treasury this year, aimed at bridging the gap between private and public markets. Richard Northedge discusses whether it will really boost investment in UK growth businesses

The need to invest in the private companies that will generate Britain’s growth is a theme expounded by successive chancellors of the exchequer. This is partly because the UK’s equity markets have long been in secular decline. The number of UK-listed companies has fallen by around 75% since the 1960s, according to Schroders. And the slump is not just in the number of companies: total equity market capitalisation in the UK has shrunk relative to the size of the economy, something not seen in the US.

There have been many reports and initiatives designed to revitalise UK equity markets. In 2011, for example, The Kay Review of UK Equity Markets concluded that the main stumbling block was the short-termism of investors. Others found the disclosure rules too onerous – “[they are] draining for boards and stymie company innovation” – and argued that low share prices post-listing can make companies vulnerable to corporate raiders. In July 2024, the Financial Conduct Authority (FCA) put in place what it called “the biggest changes to the listing regime in over three decades… to support a wider range of companies to issue their shares on a UK exchange, increasing opportunities for investors”.

Sentiment around listing in London, though, remains downbeat. At the start of December 2024, the Chief Executive of fintech bank Revolut, Nik Storonsky, said it is “not rational” for the company to list in the UK.

More liquidity

Given the challenges facing the primary markets, the Treasury has been looking at remedies. It now hopes that Pisces, the share exchange system it is launching this year, will allow businesses “to scale up and grow”. Yet Pisces, the Private Intermittent Securities & Capital Exchange System, will raise no money for companies. The shares bought by investors can come only from existing holders: if businesses need capital, they must continue turning to the sources that have already proved ineffective.

Investors may, however, be more eager to participate in capital raisings if they know they have an exit route such as Pisces. At present, the founders of private companies and their families, directors and staff given equity, plus venture capitalists who funded start-ups, are frequently ensnared in an investment they cannot sell and whose value can only be guessed at. The recent row about which investors could take part in a secondary share sale at Revolut shows how fraught things can be.

Pisces will, at least in principle, offer an escape route for those imprisoned investors. And as every sale requires a purchaser, it also offers a new way to buy into potential growth companies – even if the business receives no new capital. Part of the stated rationale behind Pisces is that it “aims to respond to the growth of private secondary markets”.

Pisces was one of the ‘Edinburgh reforms’ announced by Conservative Chancellor Jeremy Hunt in December 2022, and a consultation before the general election was well received. Labour plans to finalise legislation by May this year, potentially allowing share dealing to start.

For the businesses whose shares are traded, Pisces gives some of the advantages of being a public company while remaining private

Many may remember the last time the London Stock Exchange (LSE) dabbled with zodiac signs in the guise of Taurus, the computerised settlement system abandoned after many delays in 1993, costing the Exchange £75m and others more than £300m. However, there are important differences between the two.

In particular, Pisces is not a monolithic IT project. It is a system, not an exchange. The hope is that several operators, approved by the FCA, will develop their own Pisces platforms, largely setting their own terms. They will deal only on certain days, perhaps monthly or annually – the ‘intermittent’ of the acronym. Any holder can sell, but buyers must be sophisticated investors such as institutions or high-net-worth individuals.

The LSE aims to be one of the operators: it is already a Recognised Investment Exchange with the structures for share dealing, so it has the ‘plumbing’. Overseas exchanges might be tempted. Firms such as Aquis and JP Jenkins that already provide facilities for dealing in unlisted shares almost certainly will be. But while some high-profile brokers have huge client bases, Pisces is not for retail investors. Investment banks and private-equity houses are more likely to be customers than operators. Venture capital trusts and business angels will see Pisces as a way to exit and value investments besides being a chance to buy.

Less disclosure

For the businesses whose shares are traded, Pisces gives some of the advantages of being a public company while remaining private. Low disclosure requirements protect family firms’ privacy while allowing descendants to sell: trading information need only be given to agreed potential investors. Commercial competitors and other unwanted parties can be excluded. Pisces operators will dictate corporate governance requirements and, following the consultation, the FCA’s market abuse regime will not apply. Dealing data need not be published. And for companies still considering a public flotation, Pisces deals should test demand and help price the IPO.

Operators can choose the frequency of trading windows, how shares are sold and settlement options. Some form of electronic auction is likely, whether inviting fixed bids or allowing changes during the day before a close-of-business crossover.

Taking Aim

Previous attempts at providing a ‘junior’ market ran into problems. The Unlisted Securities Market launched in 1980 was succeeded in 1995 by Aim, the Alternative Investment Market offspring of the LSE. But despite continuous daily markets, a lack of liquidity and low volumes led to volatile prices and depressed valuations. Companies can raise capital through share issues but face high admission costs, entry conditions and disclosure requirements.

Pisces removes much of the red tape and eliminates the need for Nomads, the nominated advisers required for Aim. But companies will still have to pay the Pisces platform and investors will pay dealing commissions.

What is the future for Aim if Pisces succeeds? Nearly 1,700 companies were quoted on Aim in 2007: now there are under 700. In the past year, 100 have left, some taken over or gone bust, but most because the market isn’t working well: there were fewer than ten IPOs. The FTSE Aim All-share Index has fallen more than 40% since 2021, while the main market All-share Index rose 10%.

Pisces might well start with just a handful of operators, but even that could be too many for the limited demand

Perhaps Pisces will become a stepping stone from private to public for companies, but it may instead negate the need to join public markets. It shouldn’t be assumed that Pisces is only for small fish: some private firms will be larger than many on Aim. Given that Aim has been waning for some years, could Pisces be the excuse for letting it wilt completely? Will the LSE actively support both platforms? Equally importantly, will Pisces succeed?

The theory is that fewer dealing opportunities will mean a better attended auction and that the increased liquidity brings in additional buyers and sellers – and more companies wanting their shares quoted. The current dearth of mergers and acquisitions activity is preventing private equity investors from exiting companies. Allowing them to sell allows funds to be freed for investment in new start-up and growth companies.

In principle, Pisces could change the profile of private company ownership: families replaced by outsiders; start-up backers replaced by investors seeking lower-risk, more mature businesses; long-term holders replaced by short-term – prisoners replaced by volunteers. Institutions may see Pisces as a chance to buy into quoted companies before they float. And what of Employee Benefits Trusts if staff can hold and sell shares in their private employers directly?

The sandbox and then…?

Pisces will be launched into an experimental five-year ‘sandbox’ monitored by the FCA to allow changes before it becomes permanent. A detailed disclosure regime has yet to be developed, and while share purchases will not incur stamp duty, like Aim dealings, will the Aim inheritance tax relief apply too? Should the planned bar on buy-backs be lifted? And why not allow capital raising? Anything could change, including the five-year timespan.

Pisces might well start with just a handful of operators, but even that could be too many for the limited demand. The market may polarise into the LSE – hoping its might will make it market leader – while a few other operators fight for what’s left. The minor players can compete on admission fees, commissions, auction methods, settlement (a central securities depository or certification, for example), minimum bargain sizes, governance, dealing frequency and more. But this could trigger a race to the bottom, attracting increasingly dubious companies.

The LSE will insist on exclusivity when signing up a company, but (even if competition watchdogs allow that) could a cheeky Pisces rival unofficially offer dealing in the same firm? The Exchange needs to design a low-cost model rather than relying on its existing plumbing.

Pisces will test the appetite for private company investment. But what if more investors try selling than want to buy? If it turns the spotlight onto private firms, or if it imposes on them a degree of corporate governance, that is good, but if it attracts companies exploiting the lower standards, one scandal could seriously damage Pisces’s reputation.

Richard Northedge is a former Banking Journalist of the Year and has spent the past decade at a leading investment bank