The British equity market is shrinking

Who needs the stockmarket? British start-ups are increasingly turning to deep-pocketed Silicon Valley venture capitalists rather than public markets for their investment needs, say Peter Evans and Ben Woods in The Sunday Times. That has profound implications for retail investors.

Take recipe-box company Gousto, which is on track for £100m in sales this year. A business at the centre of the booming trends for healthy eating and home delivery would once have been a prime candidate for a public listing, yet founder Timo Boldt has no plans to float any time soon. "We were oversubscribed with our last funding round and it meant we could choose our investors," he says.

Businesses that are already listed are also going private. Last month brought the buyout of cybersecurity outfit Sophos by US private equity firm Thoma Bravo for £3bn. Britain is now emerging as the world leader in "de-equitisation", the removal of businesses from public markets, says Buttonwood in The Economist. "The net stock of equity outstanding has fallen by 3% since the start of 2018 in Britain, faster than in America. More than 70% of the earnings of companies listed in Britain come from overseas". A weak pound makes those international sales look cheap to US-based buyout firms.

Fundamentally, however, the trend is driven by cheap debt. The prospective earnings yield on the FTSE All-Share, essentially a measure of how much a company must pay for equity capital, is 7.6%. By contrast, the real yield on investment-grade corporate bonds is negative. So "stockmarkets shrink and debt markets grow", writes Robert Buckland in the Financial Times. This "crowding out" of public markets is one of quantitative easing's "many unintended consequences".