The UK tech sector – missing in action?

Since launching Woodford Views just over two months ago, I have written a couple of articles on the UK equity market and why I think it is poised to end years of underperformance. My argument is that the significant and relentless selling pressure that has weighed heavily on the market for two decades is over and that a combination of a very depressed valuation and a buoyant domestic economic outlook creates the circumstances for a sustained recovery. This upbeat narrative, judging by what I see and read, is quite unusual, but, as I hope you will have seen, it is backed by rational arguments based on observable facts.

Importantly, though, this upbeat message is caveated. As I have observed in previous blogs, the UK equity market is far from healthy. It is handicapped by inappropriate regulation and bears the scars of years of institutional and political neglect. Like any other piece of vital national infrastructure, the UK equity market needed successive governments to understand its importance to the long-term health of the UK economy and, through that understanding, appropriate public policy interventions when required.

In one recent blog, I listed five things that I thought might benefit the UK equity market and help it better serve the needs of the UK economy. They were:

1. A ban on short-selling non-FTSE 100 stocks.
2. The creation of a seeded sovereign wealth fund mandated to support UK plc and its nascent technology businesses, with the management of the fund outsourced to the private sector.
3. Pension and relevant life funds (who receive billions in tax breaks from the UK exchequer) mandated to place a minimum percentage of their funds in listed and unlisted UK equities funded by selling down their international equity holdings.
4. Scrapping a key MiFID 2 measure that banned buying research with commissions on trades.
5. Abolition of stamp duty on share purchases.

This list is not exhaustive, and I can well imagine that there are other initiatives that could help the market regain its previous, envied international status, but I do think these would make a material difference. Interestingly, it would appear that the crisis that has gripped the market is at last attracting more attention. This recent Bloomberg article focuses specifically on this issue.

The background is that the FCA has been asked to look at reforms to the UK equity market’s listing rules in an attempt to reverse the steep and worrying decline in the number of companies looking to IPO on the UK market and to make it a more attractive place to raise capital. The UK regulator has come up with a list of initiatives which it believes will help to do this, and they include fewer restrictions on dual-class shares, dropping the requirement for companies looking to IPO to have a three-year financial record and dispensing with the requirement to have a shareholder vote on significant and related party transactions. Bloomberg describes these proposed changes as a big gamble, and it would also appear that the UK regulator has not won over a number of important voices in the industry, some of whom have gone on record criticising the proposed reforms as a “race to the bottom”.

To put this whole issue into context, which I have attempted to do in previous blogs, I thought that I should show you this chart:

To compound this very worrying fundamental failure of the UK equity market, the number of listed businesses continues to fall at an alarming rate as businesses look to re-list on other markets and foreign companies continue to acquire UK-listed businesses at knockdown valuations.

Sadly, I am inclined to agree with the institutional critics of the FCA’s proposed reforms. I am not at all sure they are appropriate, and they don’t appear to be the remedy for the problems the market confronts – largely because the FCA has failed to properly diagnose those problems. Maybe this is not surprising given that the Regulator was partly responsible for the damaging reforms that helped undermine the market in the first place.

However, the FCA is not alone in not understanding the real causes of the underlying challenges the market confronts. In the same article, the Bloomberg journalist goes on to blame Brexit, Liz Truss and the fact that the UK has had four prime ministers in five years as factors that have undermined the attractiveness of the UK equity market as a place to raise capital and list a business. Frankly, I think this is errant nonsense. Apart from the fact that the stats used in the same article contradict this silly conclusion, the simple fact is that the issues that have undermined the function of the UK equity market significantly pre-date these events.

The one thing that the article does mention that is a direct cause of these problems is the lack of UK pension fund investment in the UK equity market (something that I also wrote about in a previous blog), but even here, the author partly misses the point, which is that the lack of pension fund investment is the direct result of botched pension accounting reforms introduced over twenty years ago which forced defined benefit pension funds out of the UK equity asset class.

Now, having talked about the challenges the UK equity market confronts, it’s about time that I addressed the question framed in the title of this blog. The UK tech sector, MIA?  A cursory look at the FT Share Service will tell you all you need to know about the UK’s listed tech sector. Basically, without wishing to offend the half a dozen or so listed tech stocks, there isn’t one.  

This then begs the question, why? What has happened to the UK’s long and world-leading reputation for technological leadership and innovation? I will refrain from listing here the enormously long list of ground-breaking British scientific discoveries of the last 100 years, but suffice it to say that the UK ranks second in the world’s innovation league table and is bettered only by the US, an economy that is approximately eight times bigger.

The UK economy is also well-endowed with world-leading research institutions and universities. Three of the top 10 universities in the world, Oxford, Cambridge, and Imperial College, London, are located in the southeast of England.

So, the UK has world-leading research institutions in which scientists are developing world-beating technology across many different disciplines, and it clearly has the talent not only to develop this technology but also commercialise it. The key question, of course, is why this has not translated into a vibrant ecosystem of technology-focused companies listed on the UK equity market. I believe the answer to that question is a direct product of some of the things I have already touched on in this and previous blogs. More than anything else, it is a direct product of market failure in the investment industry. In short, UK institutional capital has, for at least the last twenty years, lacked the capability, will and flexibility to provide long-term patient capital, which is the vital ingredient required to turn great science into viable, successful commercial enterprises. Maybe this should not be that surprising given that throughout this period, UK life and pension funds were exiting the UK equity asset class in its entirety, but given this backdrop, it is my view that the UK government should have spotted this obvious critical institutional failure and stepped in to address its consequences.

Unfortunately, throughout this long period, no government was able to correct this private sector catastrophe. So, in 2024, we have a vestigial quoted technology sector with only a very few genuinely world-beating tech companies listed in London. Perhaps as frustrating as this story is, it is made worse by the fact that whilst UK investment institutions were extremely reluctant to provide the capital UK technology companies needed to grow and commercialise, frequently international investors were, and so most of the best tech companies nurtured and born in the UK over the last twenty years have been scaled and commercialised in the US, Europe and Asia providing jobs, and wealth creation for those economies rather than here in the UK.

Sadly, this frustrating and depressing story persists because the UK investment environment is still extremely hostile for UK technology companies, and most still have to look beyond these shores to get the capital they need to survive and reach commercial self-sufficiency. Ultimately, though, I console myself with the thought that the best UK science and technology eventually benefits humankind because of the foresight of investors outside of the UK. For that, we should be extremely grateful.