Hello everybody, welcome to another edition of C&F Talks, the first one of, I suppose, the autumn. During these sessions, I have the pleasure of interviewing a speaker at one of our forthcoming events. Today, I have the pleasure of interviewing Tom Godwin, who's a Partner at Freshfields, and he's speaking at the Reform of the UK Public and Private Capital Markets Summit, which is being held on the 13th of October in London. Tom, welcome. 

Thank you, Maurice. Good to talk to you.

Great to talk to you.

There's been a lot of ebb and flow, if you like, in the media about the state of the UK capital markets. One Sunday, you can read in the Sunday Times that the whole thing is a disaster. A few days later in the FT, there's some very positive news, and there are obviously a lot of contrasting opinions out there. But broadly speaking, the thrust is that the US markets are the winners, the UK markets not so strong.

But that doesn't appear to be quite the whole truth, in that the American investors have been pumping, I think it was something like 15 billion pounds into UK equities over the last six months or so. So how do you see the whole picture? And do you think that there is a perceived valuation gap between the UK and the US? And is that being eroded by the sheer weight of money coming in from America?

Thank you, Maurice. It's a very good question. It's the question, isn't it, really?

I won't comment too much on what you see in the press. I think there's an enormous amount of interest in this as a topic. So, you see a great deal of press on it, sometimes a little bit jumping the gun, sometimes a little bit, as you say, not telling the whole story.

But I agree that there's certainly more confidence in capital markets globally, or very nearly globally. I think a lot of that comes down to either some reduced volatility or some pricing in the volatility. We were, as you appreciate, as everyone will know, coming into a better place in Q1.

And then following developments in US trade policy, I think volatility increased and some deals that maybe could have happened in Q2 were put back. Those sorts of things always make headlines. But the reality is that those companies shouldn't be coming to market until there's a firm grounding on which they can price themselves.

So, I think with a reduction in that volatility and other macroeconomic factors, we are seeing companies having more confidence in those markets and investors having more confidence in those markets. There's still, as it has been for a long time, a long pipeline of excellent companies. Many of them have traded well in the intervening period while markets have been quiet.

I think we're now seeing, and certainly a number of those companies working to put themselves in a position to go public when they're comfortable with the level of volatility that's out there. And as we enter the September and October window for public capital raising, it will be very good to see a number of those companies put themselves forward. 

But on the US to UK and UK versus other markets, question, I think, yes, that that increase in confidence certainly applies to the UK now in a way that perhaps it didn't as much when there have been upticks in other markets.

And that, again, I think is down to, predominantly, a reduction in volatility at home, both politically and economically, which is all very helpful. We're certainly seeing, to agree with you vehemently again, London going back to being more of the default option for UK businesses where London is the natural home market for a listing, where their investor recognition is naturally higher. And the perceived blockers for that decision seem to have largely disappeared.

As you say, I think that there has been, certainly been reported, some perceived valuation gaps. I think some of that goes away when you look at the right comps and you look at what they're like. But more importantly, the venue is perhaps a bit less important. There are not, it's not every company that could or should list in really any market. Then there'll be a right place for these companies to go. And now that the perception about markets, generally, is improving, companies, I think, are rightly being able to drive towards their natural markets.

Yeah, so maybe overall, it's an improving picture, isn't it?

I wonder to what extent, with the FCA now sort of being very positive about responsible risk-taking and generally trying to ensure that the regulatory framework enables growth, do you think that the measures they've taken to relax the regime in the capital markets, including changes to the listing regime to reduce the need for shareholder approval for certain transactions and reducing the need for prospectuses in capital raises, do you think these strike the right balance between risk and regulation?

And do you think, I suppose, a slightly supplementary question, do you think that the so-called gold standard may have slipped away in this process and that might deter some investors?

Well, I'll take the second question first, so I remember it. I think that if you talk to certain types of investors in public equities, they are very, very interested in that, in what was the gold standard or perceived as the gold standard, but I don't think that's the universal. I think that they are likely in the minority.

And if you look across at where those sorts of investors put their money outside of the UK, which they do in greater amounts, that gold standard doesn't exist. So, I think it's a nice to have for some investors, but I don't think it's been shown to be particularly important to the majority on the buy side. On the changes to the listing regime, the prospectus regime more broadly, I think that it's rightly and brilliantly gotten a lot of attention, both in terms of listing companies considering greater deal activity, greater freedom to pursue that sort of activity.

There are a lot of sort of active mandates in that area now. Due, I'm sure in some parts to the improved regulatory landscape. And also, when companies are looking at exchanges for IPO, it's often been described as putting the UK on a level playing field with other listing venues.

And I think what the FCA has done has gone a long way to achieving that. And as I said earlier, removing any perceived blocker that doesn't have an important, sort of a critical role, so that companies can choose their sort of natural home market. On the risk versus regulation balance question, I wouldn't say there's been a reduction necessarily in regulation, in that companies and boards are still subject to broadly the same duties and liabilities that they were before.

But I think what's changed and is changing is the level of process that's mandated for those companies when they're looking to execute a material transaction or a capital raise. And in that sense, the new regime I think is very helpful. It allows companies to move much more quickly.

That clearly supports the growth and innovation objectives that the FCA have outlined and that the government have been on front foot on as well. When it does come to the risk side of that, when it does come to that equation, the important thing, as you say, and as the FCA have been keen to say, is that it's responsible risk-taking. Yeah.

And so, the balance is really how boards, I think, consider those same duties and those same responsibilities to investors. And the process is that they think they need to get comfortable with a level of responsible risk-taking now that some of those mandated processes have been removed. So, the onus has been placed much more on managers and then on investors on the buy side to take their own view on those risks. And it's just incumbent on them to have the right process in place for each of these sorts of transactions so that they're doing the right thing.

Absolutely.

Turning to another topic, but another important one, you'll be moderating a panel at the summit on the changing nature of corporate governance and the relationship between companies and shareholders. Do you think that greater shareholder participation is a good thing or not?

Well, it'd be odd if I thought it was a terrible thing, I think. But it sort of depends what you mean by participation, I suppose. I do think that removing shareholder votes from material and related parts of transactions makes sense with the objectives that the FCA have.

And subject to the sort of disclosure and comfort process points that I made earlier, giving the company the freedom to put the right process in place for the deal that they want to do, I think makes sense. Shareholders are already invested. The disclosure will give them the right to vote with their feet, et cetera.

And it importantly puts London in the same place as most other listing venues. But strong shareholder engagement is really important. And traditionally, I think UK-listed companies have broadly been very good at that.

And you only have to look at the typically very strong support in London for follow-on issuances that there has been even through the last few years. London has been topping lead tables for that throughout the period to see how positively investors are able to get behind management in UK for the most part. And that isn't the case everywhere.

Also really important, certainly in an IPO process and pre-IPO, there's a trend that we've seen the last couple of years of longer periods of businesses engaging with investors before an IPO is quite in contemplation, but then also a longer track of PDI, pre-deal investor education, all of which is really important for bringing the right balance of investors to the company, bringing the company to the right investors, probably a better way of putting it, in an IPO. So yes, that engagement, absolutely critical.

Maurice

Yeah, because it wasn't not one of the streams of the Capital Markets Industry Taskforce that was looking at this whole area of shareholder engagement. And one of the issues I seem to recall was that they believe that proxy services were sort of disintermediating investors from companies, and that has not perhaps been a good thing in the longer term. Just very quickly, because I don't want to take up too much of your time. Do you think there's some truth to that?

I think there's a slight rigidity in how those organisations set up their requirements, market to market, and they sort of take the basis of the processes that are in place and then set their expectations on that. So, they've always had higher expectations, I think, in the London market than they would in, say, the US or some of the European markets where the level of governance is not quite as mandated. So, I think there's certainly some truth to that.

Always remembering that those organisations represent the sorts of investors that in a large part, listed companies really want. These are long area holders that tend to be supportive of a company over long periods and looking for value, absolutely, but also looking for growth. So, making sure that the needs of those investors is really met through active engagement with them rather than always having that intermediated engagement, I thoroughly agree with that.

Yeah, I fully agree. We've run out of time, Tom, sorry. So, we better wrap this up.

But for our viewers, if you'd like to hear more about these issues and the many related issues that affect the future of both the public and the private capital markets, do have a look at the website www.cityandinancial.com for further details on how to register for the summit, which is being held on the 13th of October in London. We very much hope you'll be able to join us.

And Tom, thank you so much for your time today. Look forward to seeing you at the event.

Thank you, it was a pleasure.