Chancellor should make equity as attractive as debt to boost post-Covid recovery

One of the rare bits of bright news since the pandemic sent the world’s financial markets into a tail-spin is the robustness of the UK’s public exchanges and the willingness of investors to stump up new capital.

Since March alone, 17 healthcare and MedTech companies have raised a remarkable £194m on AIM, London’s junior stock market.

According to fresh figures from Dealogic, that’s around 16% of the total £1.2 billion of new capital raised on AIM over the three month period. Nor does it compare too badly with last year when a total of £1.7bn was raised on AIM over the same period.

If you include healthcare firms across London’s markets since the beginning of the year, then new funding for the sector tops £1 billion. This includes £738 million from investors on London’s main stock market, plus £361 million from AIM, covering 32 deals and the IPO of Inspecs Group.

Investors were no doubt attracted to many of these companies such as Synairgen, Faron Pharmaceuticals and Fusion Antibodies because they were raising new funds to support further innovation into potential treatments for Covid 19.

Even so, it’s a great testimony to the strength of the UK’s stock markets that at such a time of great uncertainty investors were keen to risk their capital. Companies on the main stock market tapped investors for £7bn, just slightly more than for the same period last year. And if you include the corporate bond market, UK companies have had access to a total of £30bn.

While public attention has been focused on the emergency bank lending schemes organised by the Treasury and the Bank of England for companies, of perhaps equal importance going forward is going to be the ability to access new equity. Raising fresh capital is going to be more vital than ever as companies look to either strengthen their balance sheets or fund growth as we emerge from the devastation wrought by putting the economy into deep freeze for three months. Indeed, ensuring that companies have access to the widest and deepest capital markets is paramount, and often a far more effective way to grow a business than bank lending.

If in doubt about the significance of deep capital markets for the UK’s corporate health, then a new report published today (Thursday) by New Financial, a City-based think tank, together with BNP Paribas, rather proves the point. In one of the most comprehensive studies of its kind the report, entitled The value of capital markets to the UK economy, found that the UK’s capital markets are much more essential to British business than many might expect.

Around 90% of UK’s biggest companies – those with revenues of more than £200m a year – use the capital markets to raise money, manage risk or restructure. That’s about 1,000 companies employing nearly six million people across the UK and their combined revenues of £3.1 trillion are 50% larger than the UK economy.

Nearly half of those UK companies with revenues of more than £200m are listed on the stock market. These 500 companies employ more than 3 million people across the UK and are worth a combined £2.7 trillion. And over 40% of these companies have used the stock market to raise nearly £120bn.

Since the middle of March nearly 100 of them have raised £5bn on the stock market.

At least 80% of all UK companies use derivatives to help them manage risk. Nor is it just the big corporates that access these markets: at least 14,000 smaller UK companies, employing around two million people, also use the capital markets for some function.

Looking back over the period from 2014 to 2018, the report also found that UK companies raised around £750bn in the bond, equity and leveraged loan markets of around £150bn a year. That’s as well as the annual flow of gross bank lending of around £300bn a year in the UK.

As well as using the equity markets, more than a fifth of the bigger companies used the corporate bond market to raise £270bn, and of these companies 230 of them employ around 2.3 million people in the UK. Another 200 companies used the leveraged loan market to raise another £215bn and, since the pandemic struck in the middle of March, nearly 50 UK companies have raised around £25bn in the corporate bond market.

While the report was commissioned well before the government imposed lockdown on huge swathes of UK industry, it’s timing could not be more opportune to raise their profile and importance to the British economy. Companies are going to need the capital markets more than ever to raise new funds for growth or indeed, to restructure their businesses as they come out of lockdown and recover from Covid-19. To do so, company bosses will need to keep attracting  investors – the big pension funds and the retail investor – to risk their savings on the long-term health of their companies.

Yet there is so much more the Treasury could do to make this more efficient and fair. Taking a bet on the recovery of these companies and investing in growth could be made even more attractive to investors if only the Treasury were to reform the tax system so that investing in equity has the same tax advantages as those afforded to debt.

Persuading Whitehall and Westminster to level the playing field between equity and debt is one of the City’s longest running campaigns. It’s also one of those bizarre paradoxes that shareholders are taxed multiple times when they invest in a company’s shares; they buy the shares out of taxed income, there is tax on the dividends and then on the sale of the shares. Desperate times need dramatic measures. And the Treasury knows just how desperate the outlook is for the UK economy.

As the Chancellor, Rishi Sunak, said earlier this week, we are facing a recession we have never seen the like of before. To date, the former Goldman Sachs banker has shown formidable courage in pushing through emergency schemes which will help companies raise billions and billions in debt, some of which may never be repaid. Now he needs to show the same mettle and push through much-needed tax changes to help them raise more capital.