Against a backdrop of record retail brokerage account openings globally, experts from practice and policy gathered to discuss what the growing role of retail investors means for the UK’s equity capital ecosystem and the health of its listed markets.
Panellists included Lord Paul Myners, former HM Treasury City Minister; Merryn Somerset Webb, Editor in Chief of MoneyWeek; Richard Wilson, CEO of Interactive Investor and Mike Coombes, Head of External Affairs at PrimaryBid. The webinar was moderated by Marcus Stuttard, Head of UK Primary Markets and AIM at the London Stock Exchange.
In 2020, there were very strong levels of further issuance in the UK, with nearly three times as many transactions taking place in the London markets as the next closest market in Frankfurt. This was driven in part by institutional demand and boosted by the regulatory and government support provided early into the pandemic.
It was also driven by an increase in retail investor activity. “The important thing in all of this is that we saw an increase, from quite early on once the pandemic hit, of retail investors participating, particularly on some of the follow-on issuances,” explained Stuttard.
Traditionally lower than in other European countries, retail participation in UK capital markets has grown in recent years, with a focus for many of the panellists being how to capitalise on this growth and keep the positive momentum going.
So, what do retail investors want? The answer may surprise some. It is unlikely the majority of them want to become stock pickers. Rather, most of them simply want their say in things. And there is a real risk of disenfranchising retail investors if they do not feel treated equally by the markets.
As Somerset Webb pointed out, “one of the reasons why I think we have got to the point where corporates and individuals feel so separate, is because individuals feel they have no influence over the corporate world. Not understanding that, of course, as the main owners of companies they should have a huge amount of influence.”
“Individuals feel they have no influence over the corporate world. Not understanding that, of course, as the main owners of companies they should have a huge amount of influence”
Merryn Somerset Webb, Editor in Chief, MoneyWeek
“This idea of whether shares should or should not be held by retail investors, whether they should be held privately or by institutions, it’s a slight red herring,” she added. Indeed, the vast majority of the population is a shareholder through their auto-enrolment pension.
The solution, therefore, is to empower the retail investor. “The retail investor should not only be a retail investor but know they are a retail investor and have the ability to influence the way the companies in which they are invested are run,” she explained.
However, the industry still has some way to go. “Capital raising this year has been around £45bn, only 6% or thereabouts went to retail. Something is wrong there given direct retail ownership is around 13,5%,” remarked Wilson. “We provide free voting service to all our customers, yet only 10% vote. In terms of engagement, feeling that your vote counts, the language being understandable – clearly there’s a gap.”
Yet all panellists agreed that retail participation is beneficial for all. The markets can only be sustainable if there is shareholder democracy. And this awareness is not only necessary for existing public companies but is also applicable to private corporations. Stuttard indicated that, at the London Stock Exchange, “one of our big goals is to make sure that more of the big private businesses – many of which are staying private for longer – are really thinking about the public markets and that ability to democratise wealth creation.”
Technology to the fore
This democratisation likely wouldn’t have been possible without the development of technological solutions and platforms to reduce costs and facilitate market access to retail investors.
As Coombes noted, “there is a lot of innovation going on.” Thanks to its technology and platform, PrimaryBid is playing its role in helping provide retail investors with access to companies’ capital raises.
Progress to date is encouraging and has resulted in increased engagement from companies looking to include retail in their fundraisings. Coombes mentioned that, at the start of 2020, PrimaryBid’s conversations with boards focused on why they should include retail investors in these transactions. Fast forward to today, it’s become a question of “why wouldn’t we include them?”
Stuttard concurred: “We’re definitely seeing a trend towards companies engaging with their individual investors, partly as a follow-up to MiFID II. A lot of companies are engaging via our issuer services portal – a lot of that is directed at retail investors. The direct engagement between company boards and individual investors has increased and technology has really stimulated that.”
“The direct engagement between company boards and individual investors has increased and technology has really stimulated that”
Marcus Stuttard, Head of UK Primary Markets and AIM, London Stock Exchange.
Despite the benefits that retail participation offers, namely introducing greater liquidity and ensuring better corporate governance, these investors are often misperceived and misunderstood.
Contrary to popular belief, their overall behaviour leans towards long-term investing. Retail investors are loyal and have significant capital to deploy. Yet there remains an unfair playing field.
“PrimaryBid came to prominence earlier this year in the accelerated transactions that dominated the first part of the pandemic,” explained Coombes. “At the time, we talked about the four Ds: dilutive raisings, done at a discount to the share price, done off depressed share prices, with dividends cancelled. These are valuable deals ”.
However, there is no need to exclude retail from these transactions. “We did poll our customers,” remarked Wilson, “because one of the arguments is that it’s all too quick and retail can’t respond fast enough. Over half of our customers said they’d be able to make a decision on a raise within the day.”
So, regulation needs to change to keep pace with the changing times and changing retail investor profile. This is easier said than done, and it is important to consider the role that existing market participants can play in helping, or hindering, these efforts. “We’ve ossified the system by excessive regulation around capital raising,” warned Myners. “Don’t expect any player in the market to be a firm advocate of change because, by definition, they’ve become a voice in the market because their current business is doing quite well out of the way things are run.”
“We’ve ossified the system by excessive regulation around capital raising”
Lord Paul Myners, former HM Treasury City Minister
Nonetheless, longer-term prospects remain encouraging, leaning towards greater participation, transparency and fairness in the market.
“One of the things we’ve seen during this whole Covid period is people reengaging with their finances. It’s been exciting for all of us involved,” said Somerset Webb. “I think we’ll see a completely different world in the next ten years, business models will change, and the consumer will be the beneficiary. In the meantime, to help that we need to change some of the rules,” added Wilson.
Because ultimately, enabling retail participation isn’t just for the benefit of the individual. “We hope this isn’t just a good thing for retail investors, but also for issuers and the ecosystem. Both in terms of liquidity, but also for corporate governance reasons,” concluded Coombes.