The UK must unlock a wave of cash from domestic pension funds and revamp the structure of its capital markets to attract the £1 trillion of investment needed to achieve its target growth rate over the next decade, a report by a City grandee has found.
The Capital Markets of Tomorrow report, led by former Legal & General boss Sir Nigel Wilson as part of a government-backed push to revive the City, warned the UK will need to attract £100bn per year over the next decade to support a target three per cent growth rate.
However, British markets have been stifled by a “risk-off” culture that has eaten away at investment from top institutions and the British public in the past two decades, Wilson found. Homegrown firms also currently attract “limited investment” from large UK institutions.
Wilson has said retail share ownership among UK households has also cratered by half over the past 20 years, and the average person needs to be tempted back into the stock market.
“There is a significant amount of “dry powder” that could be put to better use,” his report has found today.
The deepdive penned by Wilson and a cast of City thinkers including Mark Austin, the capital markets lawyer, form the latest of the Square Mile’s efforts to reinvent itself and revive its IPO market after a drop in listings over the past two years.
London has been left in the dust by the US markets where deeper pools of capital and less cumbersome regulatory environment have drawn in tech firms and growth companies from around the world.
While the IPO market globally has been hammered by soaring inflation and rising interest rates, London has felt the squeeze more acutely than most. Just 23 firms listed in London last year, a 49 per cent decline on the 45 recorded in 2022 and the quietest year on record since the financial crisis.
Wilson said there “has never been such a large amount of money globally available,” and the UK now needed to tap investment from individuals and institutions to solve the issue.
“Capital pools include domestic and international capital sources such as sovereign wealth funds, retail investment, private equity ‘dry powder’, and the UK is fortunate in that we have £6 trillion of long-term capital within our pension and insurance industries,” he said. “In other words, the supply of capital for growth is available.”
Mark Austin, who co-authored the report, told City A.M. the recommendations form part of an “ongoing journey” to revitalise the City and make the UK’s capital markets “match fit” again.
“When the markets do well, our economy does well. Already this year, more than £20bn of equity capital has been raised in London – more than three times what was raised in the next three European exchanges combined – to support businesses to invest, innovate and grow,” said the City minister, Tulip Siddiq.
Boosting pension investment
The report comes as City grandees and government ministers gather at the London Stock Exchange today to discuss the health of the UK’s markets, led by the Capital Markets Industry Taskforce, which is headed by London Stock Exchange chief executive Julia Hoggett.
Central to the chatter at London’s bourse will be how to push the UK’s domestic pension funds into listed equities and encourage a risk-taking culture
However, a report from a think tank aligned with the group has underscored the scale of the challenge today.
New FInancial found that on “virtually every metric”, UK pensions are towards the bottom of the pack in terms of their allocation to domestic equities compared with 12 other developed pension systems on both an absolute and relative level.
The proportion of their assets that UK pension funds allocate to UK equities has fallen to 4.4 per cent, down from 6.1 per cent last year and a sharp decline from over half of their assets 25 years ago.