The “ongoing viability” of London’s junior stock market would be threatened if the government removes business relief (BR) from its shares in next month’s budget, the exchange’s owner has warned ministers.
Sky News has obtained a letter sent by Dame Julia Hoggett, the London Stock Exchange (LSE) chief executive, to Tulip Siddiq, the City minister, which includes a stark alert about the potential impact on the Alternative Investment Market (AIM) of radical tax moves next month.
In it, Dame Julia expresses concern about “the current fragility of the market and this concern is shared by companies and fund managers across the market”.
AIM, which is positioned as the LSE’s international exchange for growth companies, has contracted from 819 companies with a combined value of £131bn at the end of 2020 to 704 companies now valued at approximately £76bn, according to Dame Julia.
The LSE chief said removing BR from AIM shares – a fundamental part of the appeal of London’s junior market – “would remove a core source of capital undermining the market’s capital base and bringing its viability into question over the short to medium term”.
She added: “An announcement of the removal of BR in the budget is likely to result in significant market volatility as individual investors and IHT funds seek to liquidate holdings in companies that have been long-term beneficiaries of BR investment.”
And she warned: “Given the illiquid nature of smaller companies, we are concerned that this volatility would have a disproportionate impact on share prices across the market.”
Dame Julia’s letter amounts to the starkest warning to date from the exchange about the future of AIM, which has provided a model to other international exchange operators but which has been beset by concerns about a lack of liquidity and corporate governance issues at some of its companies.
“Given the concerted effort being made to improve the funding environment in the UK including the development of PISCES, we are genuinely concerned that the removal of BR and its direct impact on growth markets such as AIM would create a very negative perception about the government’s commitment to this agenda,” the LSE chief wrote.
Her letter to Ms Siddiq comes just over a month before Rachel Reeves delivers the first speech by a Labour chancellor for nearly 15 years.
Tulip Siddiq MP in 2019. Pic: Reuters
The new government has warned that the problematic economic inheritance it has been saddled with will lead to difficult tax and spending decisions.
Dame Julia is a key member of the Capital Markets Industry Taskforce, a joint government and industry body, and one of the City’s most respected figures.
She has played a pivotal role in advocating listing rule changes which have been approved by the Financial Conduct Authority in an attempt to improve the international competitiveness of London’s capital markets.
That drive has been spurred in part by the number of large London-listed companies – among them the gambling giant Flutter Entertainment – which have switched their primary listing to New York.
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The City has also missed out on a string of prized initial public offerings (IPOs), most notably that of the chip designer ARM Holdings, exacerbating fears of an inexorable post-Brexit decline in London’s standing as a financial centre.
Those concerns may, in part, be alleviated by a decision from the Chinese-founded online fashion giant Shein to list in London, although its flotation plans are proving to be contentious because of the company’s labour rights record.
In her letter to Ms Siddiq, Dame Julia said AIM had played “a crucial role as a source of equity capital for growth and development”.
She cited data showing that UK-based companies admitted to AIM contributed £35.7bn gross value added to UK GDP and directly supported more than 410,000 jobs in 2023.
“Furthermore, through their supply chain expenditure, these companies support a further 212,000 jobs and £18.6bn of GVA and are estimated to contribute £5.4bn in corporation tax,” Dame Julia wrote.
She also told Ms Siddiq that companies listed on AIM were geographically and industrially broad-based, were “more productive than the national average and have consistently generated four-times as much of their revenue from overseas exports, compared to private companies”.
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In her letter, Dame Julia also highlighted that smaller quoted companies had been disproportionately affected by recent outflows from UK-listed shares, with net outflows in three of the last four years.
“The package of fiscal incentives including EIS, VCT and BR are designed to address long-standing market failures to ensure companies can transition to the public market, raise capital, scale and stay in the UK,” Dame Julia wrote.
“Without these measures, investors would likely concentrate their investments in larger, more liquid companies, denying growth companies access to risk equity capital through the public markets.”
Dame Julia also said that more than 660 AIM-listed companies with a combined market capitalisation of about £73bn were eligible for business relief.
“Around 75% of these companies are smaller companies in the £0-£100m market capitalisation range – the category of companies regularly identified as otherwise being more susceptible to capital constraints,” she wrote.
“The availability of BR has been one of the few constant features of AIM.
“As a result, investment encouraged by BR has become a vital source of capital for AIM companies.
“Around £6.3bn of capital is managed by the largest AIM IHT funds.
“However, the total amount of capital allocated to AIM companies, where BR is a factor in the investment decision, is likely to be much greater.”
A spokeswoman for LSEG, the LSE’s owner, declined to comment.