There has been much comment on the fact that equity markets in the US and Europe have been shrinking for some years now, certainly in terms of the number of quoted companies, if not in total market capitalisation (MCap). This paper has been written with the assistance of the Quoted Companies Alliance (QCA) and focuses on the evidence for such in the London market and, in particular, that for smaller and midcap companies. It assesses that evidence and considers explanations. Finally, we ask why it matters, and assuming that it does, what practical steps can be taken to reverse the trend. Successful public markets have been a key part of the United Kingdom’s economic success for generations, even centuries, and we should not allow them to wither on the vine.
The total number of companies quoted on the London Stock Exchange (LSE) actually rose between 1999 (2,257) and 2007 (2,933), before falling back to 1,791 by 2019. However, looking at the total number of companies masks an underlying picture of almost continual decline in the Main Market, offset by the extraordinary success of AIM until 2007.
Since 2007, both markets have seen a decline in the number of companies, the Main Market by 25% and AIM by 49%. Excluding the financials, the number of companies quoted on the Main Market has fallen by 60% since 1999. This compares with a 52% decline when financials are included.
Looking below the largest 350 companies, we find that the number of nonfinancial companies on the Main Market has fallen by 72% since 1999. By December 2019 the number had fallen to just 252. The average MCap of a quoted company outside the largest 350 has risen sharply. Adjusted to 2019 prices, the average MCap of a small cap company has grown from £38.9m in 2008 to £152.7m in 2019 (adjusted for inflation).
Although there have been ups and downs, the long-term path for the average MCap at Initial Public Offering (IPO) has had a strong upslope. In 2019 pounds, the average MCap has risen from £21m in 1995 to £515m last year (excluding Investment Companies and Glencore’s float in 2011). The average AIM IPO MCap has grown from £21m in 1995 to £127m in 2019 (again ex-Investment Companies and expressed in 2019 pounds).
On average, companies leave it much later to “come to market”. There is plentiful evidence about the reasons behind these trends. A growing regulatory burden, low interest rates making debt attractive and increasing competition from private equity for opportunities are cited as the main factors by companies.