Prove what Britain’s worth, says MAGGIE PAGANO

Amidst the blame game going on over SoftBank’s decision to float Arm in New York rather than London, lies an irreducible fact that doesn’t get enough attention: For the last 20 years, British investors have fallen out of love with British stocks.

The figures from the New Financial think tank speak for themselves.

British pension funds used to own 39 per cent of all companies listed on the London Stock Exchange and today only 6 per cent. UK insurance funds once invested 27% of their portfolios, now it’s 5%, while UK asset managers now only invest 10% of their allocation, up from 26% two decades ago.

This massive shift from equities to bonds – actively encouraged by the authorities and indirectly leading to the explosion of Liability-Driven Investments (LDIs) – has had several devastating effects on the growth of UK companies, the way capital is allocated to them and how the depth of the London capital markets.

More importantly, it has also changed the mood and culture within the investment environment, making all UK investors risk averse.

This in turn has led to much lower valuations of companies compared to their US and even European peers.

So you can’t blame those high-growth or more mature companies, especially those in the technology sector, who look longingly across the Atlantic to see how the multiples are being achieved by their peers.

Indeed, the climate here has dried up so much that several CEOs of some of the UK’s most exciting, forward-thinking life sciences and biotechnology tell me that they go straight to the US funds to raise money because venture capital funds here don’t want that. know.

If big UK companies can’t get domestic investors from their own pension funds to back them, why would foreign investors want to follow suit?

Anything else that the Arm debate touches on as an explanation for why the city is losing out to New York – the UK’s strict listing requirements, criticism of high wages or even concerns about ESG – is a distraction.

Attempts to improve and reform London’s capital markets, such as the Edinburgh Chancellor’s Reforms and the Hill Review, are valuable but miss the bigger picture.

One City figure put it more bluntly: there are no domestic equity investors here, everything else is a symptom. He said global investors look to domestic investors for the signal for validation, “and that local signal just fizzled out.” Some might say that the power supply is also off.

So it’s significant that London Stock Exchange CEO David Schwimmer brought up the collapse of domestic funds investing in British companies when asked about his reaction to Arm’s move to New York.

It certainly does, and it would be interesting to learn more from American Schwimmer about how this could be changed.

It’s not the lack of capital: the UK has the second largest pool of long-term capital in the world after the US. Only by enticing those pension funds to back British businesses does the city have any hope of creating a healthier climate for growth and innovation and showing companies like Arm why they should choose London over New York. (Authorities on both sides of the Atlantic should also look at changing the rules to make double listings easier and cheaper).

Convincing pension funds to fall in love with stocks again will be harder than the fight: it always is. It requires serious thinking – and major structural changes – by the industry, in cooperation with the authorities. But admitting there is a problem is a good starting point.

There’s another problem: the ease with which successive governments have given their thumbs up to foreign bidders taking over British companies on the cheap.

Think of SoftBank’s original acquisition of Arm in 2016 and Schneider Electric’s more recent bid for electronics company Aveva. That is why it is so ironic to hear the former chancellor, Philip Hammond, complain that London has become a less attractive location due to the list criteria and lack of deep pools of capital.

It was under Theresa May and Hammond that Arm’s bid was approved despite a huge outcry, intense lobbying by the founder and fears for safety.

What shortsightedness and what hypocrisy!