Unlock stock picks and a broker-level newsfeed that powers Wall Street.
Cut taxes to save London’s stock market, say City chiefs
Michael Bow
6 min read
Julian Morse (left) and John Farrugia (right) believe more radical measures are needed to revive London's appeal for entrepreneurs - Cavendish
Saving Britain’s dwindling stock market requires bolder government intervention including tax breaks for entrepreneurs, the leaders of City stockbroker Cavendish have said.
Amid gloom over the health of the London Stock Exchange, Cavendish co-chief executives John Farrugia and Julian Morse said some of Britain’s best businesses were opting to stay off the London market and team up with private equity backers instead.
Deeper reforms than those currently on the table are needed to revive London’s appeal for entrepreneurs, the pair said.
Mr Farrugia and Mr Morse suggested that scrapping capital gains tax for entrepreneurs who sell shares during an initial public (IPO) offering was one way to give the stock market a clear edge over private equity.
Cutting corporation tax for pension funds that invest a minimum amount of their assets into UK companies would also provide a shot in the arm.
Mr Farrugia, 47, said: “What the Government should be looking at is the indirect benefit of allowing an entrepreneur potentially to list and not pay any capital gains tax.
“The indirect benefit is you [would] have awesome companies on the public markets. At the moment the best companies are staying private.”
Small business owners currently pay capital gains tax of around 10pc on the first £1m earned from selling their business – equal to £100,000 – and 20pc on anything above this level.
The tax is paid regardless of whether the exit is through a private sale or an IPO, meaning abolishing it for the IPO route would give the stock market a significant edge over a private equity sale.
Mr Morse, 52, said British pension funds also needed further encouragement to invest in UK stocks.
Only 4pc of UK equities are currently owned by pension funds and insurers, down from 46pc in 1997.
Mr Morse said: “There has been a structural shift away from equities over the last 20 years as pension funds have been allocating away from UK equities and into either global or different asset classes. That has not helped.”
Fears that London’s once-thriving stock market is becoming a global backwater have been fuelled by a collapse in the number of new companies coming to market.
Only 23 companies floated in London last year, raising £1bn. It puts the market behind the Oman stock exchange for the amount raised through new listings.
This year has also started slowly, with Kazakh airline group Air Astana and MicroSalt the only new debuts so far.
A raft of exits from the FTSE 100 to rival exchanges, including the likes of Tui and CRH, and the failure to convince chip designer Arm to relist in London has also hammered confidence in the market.
The dwindling size and prestige of the London market means Microsoft is now worth more than the entire FTSE 100 combined.
Alarm bells in the City have prompted a raft of reforms from Chancellor Jeremy Hunt, including plans for a British Isa to encourage more retail investment into UK stocks.
However, Mr Farrugia said bolder reforms were needed. He described the proposals put forward so far as “piecemeal”.
“We need something to unlock it. What the Government is doing right now is nowhere near enough.”
Cavendish is one of the UK’s largest brokers to small firms, with 140 clients on the junior stock market and further 60 on the main market.
It specialises in advising fast-growing small and medium-sized enterprises that form the backbone of the British economy. As such, Cavendish has a unique insight into the UK’s current economic environment.
Mr Farrugia said the outlook was “generally more positive” than last year with inflation falling faster than expected and hopes of imminent interest rate reductions.
“The tone has changed,” he says. “If [companies are] considering something that went on hold, they’re now starting to have that conversation again.”
Despite a looming election this year, the duo are not concerned by a possible change in government.
Mr Morse said: “To be fair to Labour, they are making the right noises about being business-friendly. It doesn’t look like there’ll be any sort of seismic shocks in terms of policy which is going to change the outlook.”
Cavendish was formed last March when London-listed brokers finnCap and Cenkos came together in a £21m all-share merger.
The group, which recently reported a £2m operating loss and lower revenues, is not alone in seeking a merger partner during London’s float famine.
Former Barclays bankers Bob Diamond and Rich Ricci recently merged Panmure Gordon broker with Liberum.
Numis also succumbed to a £400m takeover by Deutsche Bank.
These deals are “no bad thing”, according to Mr Morse. He hopes they will shake up the market and leave clients up for grabs.
“We want to have decent competitors and stability in the market. Deutsche and Numis creates a very big opportunity for us because when people merge, they tend to move out of certain markets as well.”
Before giving up independence, Cenkos Securities had a reputation in the City as a hard-driving “eat what you kill” broker where bankers who brought in a deal would get the lion’s share of the fees.
Mr Morse, who joined Cenkos in 2006, said “eat what you kill” was a “misnomer”.
“That didn’t really happen. ‘Eat what you kill’ was sort of true because you can only pay bonuses out of the revenue that has been generated. But it wasn’t as individualistic as that.
“When I took over as CEO [in 2021] there was a far more collegiate way of working because especially when markets are hard you have to act as a team. This is a team sport.”
Under former chief executive Jim Durkin, now retired, Cenkos helped orchestrate IPOs for the likes of AA and British Car Auctions during the private equity boom years.
Situated near London’s former Smithfield meat market close to St Paul’s Cathedral, Cavendish currently has a staff of around 150 people who work across broking for listed clients, debt advisory and private M&A.
In one of its meeting rooms is a reminder of a former client, Pimlico Plumbers. A small blue die-cast toy plumber’s van sits on a tiny plinth.
The toy acts as a symbol of the company’s long-standing relationship with the group’s founder, entrepreneur Charlie Mullins. Mr Farrugia and finnCap helped Mr Mullins sell Pimlico to KKR-backed Neighborly in 2021.
That deal is also a reminder of how far private equity has seeped into Britain’s capital markets landscape.
As Mr Farrugia points out, the rise of private equity has arguably been one of the main factors behind the slide in London’s stock market dominance.
“No one has really correlated what has happened to the IPO market over the past 20 years with the private equity market over the same period,” he said.
“Over that time I’ve seen so many private equity firms form and so much more capital become available. Suddenly there is competition in the UK public markets.”
Mr Morse added: “Private equity is probably more in vogue [now] but people will realise that public markets offer other advantages that private equity doesn’t.
“The key one is you don’t lose control if you’re on the public market. You can make long-term decisions.”
It’s a decent pitch – but without more policy support from the Government, it may keep falling on deaf ears.
