Hello everybody, and welcome to another edition of C&F Talks. This afternoon it's my pleasure to have with me Tom Goodwin, he's a partner in Freshfields Capital Markets Group.

Tom's going to be speaking at our upcoming Reform of the UK Public and Private Capital Markets Summit, which is being held in London on the 5th of October. Tom, welcome. 

Hi Maurice, thank you. Thank you for having me once again. 

Great to have you with us today. 

My first question is really around the whole area of retail access and consumer protection. Clearly private markets have become very important in the UK, accounting for 73% of UK equity capital and understandably there's a growing political and industry pressure to allow retail investors greater access to these markets through vehicles such as the LTAF, long-term asset funds. However, regulators for their part are concerned about the illiquidity, valuations and higher risk profile of private assets. How can retail investors gain access to private markets do you think whilst ensuring the required degree of consumer protection? 

Well thank you Maurice, it's a very wide question, a very live question.

The FCA's review which you referred to last year really focused quite heavily on valuation policies and practices as you'll be aware and that is the area that alongside liquidity that I think gives retail investors pause and certainly gives those that regulate the consumer duty pause when it comes to private markets. I think in terms of how those rules develop or may develop that the FCA and also now to an extent in the future the Bank of England have given quite a good steer on where they see regulation forming a part of that market and that is around valuation and it is around governance, the potential for conflicts to arise in the way that valuations take place is something that the FCA highlighted in its review but there are a number of ongoing consultations that give us some idea about the direction of travel. The FCA is consulting on a variation of UK AIF rules, they're also consulting at the moment on a fund reporting framework called FRAME helpfully and both of those will target a portion of the private fund market in the UK, obviously only those funds and fund managers that are regulated by the FCA, so not only AIFs but also UK USITs, various forms of venture capital investment fund which accounts for a good chunk of the ecosystem and in their consultations the direction of travel without going into too much detail is for a probably an increased level for some funds but for others a reduction in reporting standards, that reporting will vary depending on the size of the funds because as the regulator has said quite rightly that the issue that they're seeking to ensure is that those funds that could have the maximum impact on market integrity and therefore wider consumer protection are those on whom an enhanced reporting obligation is placed, so for funds that manage over 500 million the FCA is thinking about those enhanced reporting standards and for everybody below that there'll be a sort of a baseline reporting and that reporting will cover performance which goes to the valuation point and then I think that's probably the central area that then goes to what the FCA is looking to cover in its second system-wide exploratory scenario which is going on at the moment too and really I think the way that the FCA is looking at this is the right one which is that the reporting to the regulator will be on the same basis as those funds and those managers report to their investors and that's key right because if you try and impose a second level of definitions of calculation on those valuations through the regulator then create a distortion between what the regulator is seeing and what investors are seeing which after all doesn't really help with consumer protection and you also create this enhanced burden from the reporting so I think all that is very sensible, it will allow for investors to place greater confidence, have greater visibility in some cases but more so confidence in the reporting that it is going to a regulator in the same form.

There's also a minimum level now of reporting when it comes to performance both gross and net returns and suggested guided calculation for how you would come up with those numbers if you don't already report them to investors so possibly for smaller funds and all of that I think is helpful. 

That particular issue should be manageable and dealt with proportionally from what you're saying. Turning to the Mansion House Compact and Fiduciary GC, the Mansion House Accord commits major UK defined contribution schemes to increasing allocations to private markets.

What are the principal legal and fiduciary hurdles for trustees in meeting this commitment given their primary duty to scheme members rather than to government growth objectives? 

Well I think it's important to take the accord in the right context and that is that it is a political and industry commitment which is expressed in aggregate, it's expressed in terms of scheme-wide percentages but as you allude to trustees have a fiduciary duty which is focused on individual member outcomes and can be as granular as that and that fiduciary duty requires trustees to take into account evidence for each investment decision that they make in order to serve their members' financial interests to the best of their ability and that legal obligation is the overriding one for those trustees. The Accords drafting concedes this, understands this, talks about allocations having to be in the best interests of savers and it talks about the commitment being subject to there being sufficient pipeline of investable UK private market opportunities to the extent for the five percent that they're guiding needs to go into UK markets. So at the moment there is no more than a sort of optical tension and trustees will need to continue to ensure that they comply with their fiduciary duties with this additional guidance commitment in mind.

The issue may well obviously become sharper if the new pension schemes bill does include a greater power to mandate specific asset allocation and I think the industry has been quite clear on the difficulties that can and will arise from a more mandatory requirement like that because that will bump up very quickly against those fiduciary obligations unless they include similar conditionality that we see in the Accord. 

Yeah indeed. Turning to the development of Pisces and the future of IPAs, I mean Pisces represents a hybrid secondary market for private company shares offering periodic liquidity without the full burden of a public listing.

How might this new regime and the traditional decision a company faces between remaining private and pursuing an IPO, how might that be affected do you think and what are the key legal complexities of this bespoke disclosure framework? 

Well I think the first thing to say is that Pisces is not an alternative to going public and I don't think that it's certainly not intended to be. There are features of it which may well cover pre-IPO companies for issues that they might otherwise have to go to the public markets for but at its root Pisces provides a market for repeatable efficient secondary sales by shareholders and it's therefore part of a company's funding continuum as it moves through its life cycle and primarily geared towards employees. The ways that we've seen it used so far have been for the vast majority for employees and for early angel investors to realise some liquidity.

So that doesn't go to obviously the plethora of reasons that companies go public, developing governance, creating a market and the company's capital and the benefits of profile and market goodwill that come from being a listed company but it does bring companies into a disclosure-based regime which is a good stepping stone for private companies to start developing the right practices and the right governance in order to disclose in those intermittent windows. So I think as you say it shouldn't alter the decision point for companies that are considering either staying private or going public because the benefits of going public are many more than providing liquidity to employees but it's certainly a helpful stepping stone. On the complexities of the regime I think really to the extent that there are complexities they arise from the level of decision making that's left in the hands of issuers or the companies as they won't be issuing shares, it's purely secondary market.

There are various forms that a private securities market can take under Pisces but the sort of most widely used one so far under the Pisces regime anyway being the LSE's market and there's probably two areas in which the company is given some leeway and some decision making to do. One is that there is a comply or explain model around the core information so companies are permitted to omit core disclosures if they're able to explain to the satisfaction of the operator which is the operator of the platform so the LSE and the business of their Pisces platform to the operator's satisfaction that that is appropriate and I think that is something that market practice needs to develop around as to whether a gap in that reporting is material or not and as the market develops in the FCA sandbox there'll be an opportunity for that to happen. And the second is that beyond the core disclosures there are options again for how operators may require enhanced disclosure and one of those models the one that the LSE's platform operates is the ask model which is broadly a Q&A platform that investors can subscribe to and ask the company further disclosure questions but there's an obligation on the company to answer necessarily all those questions.

That practice, the level to which the company engages with it is something that the operator needs to police but that's I think quite a big role for the operator to play and again one that the market practice needs to start developing around but those are some of the complexities that companies and operators need to be considering.

Yeah I mean it certainly appears to be a great innovation to bridge that divide between public and private but early days yes I guess at the present time although running out of time but one final question an inevitable question really you read every day in the media about the decline of London listings and public to private transactions and listed companies going private with what they say nearly 500 UK firms to listed from the London Stock Exchange by private acquisitions between 2016 and 2023. 

Do you think that is it that the legal and regulatory burdens of being a public company that drive this trend and do you think that all the measures of which there are many but the recent listing rule reforms for instance will reverse the trend? Do you think that the doom and gloom in the media currently is missing the point and the things have turned and things are improving? 

I think there's a number of points in there.

I don't think it's quite as many as 500 that have to listed in that time but the I think the core point is that I very much doubt that any of those companies that have been taken private over that period have done so because of the legal or regulatory burden on them or certainly not very many. The issue around those companies is one of valuation. So while the listing rule reforms are very welcome and they put London on a level playing field particularly in terms of new market entrants I don't think there are there are very many market participants who have moved or who have come off the market altogether because of a perceived difference in regulatory burden between London and elsewhere or between London and being private.

So no I don't think that it is the role of the listing reforms to reduce the number of companies that are being taken private off the market. As I say I think that is an issue of valuation which is which is well documented and comes down to a number of a number of issues that are that are not related to listing law reforms. 

I mean it's a very interesting area isn't there. I saw recently some comment about liquidity levels being much higher in London than some of the figures have suggested, dark pools not being taken into account and so on. It seems that some of the figures and stats people quote are not desperately accurate in in this area and we just have to hope that things are going to improve. But you're I'm a firm believer that things will improve and by the sound of it you are as well Tom.

I am and that is a little bit more than a faith-based approach fortunately. So we're certainly seeing a change in we've seen a change in narrative around London in the last couple of years really. A lot of that goes alongside having a regulator and a market operator that are hands-on, that are aware, that are making sure that things remain up to date and user-friendly and that sort of thing.

All of that is very welcome to new issuers. I think that the sectoral differences between London and elsewhere awaiting perhaps more towards FIG assets, natural resources, things like that, away from tech and AI multiples evaluations that you might see on other markets particularly in the US has been perceived as a weakness. That variation, that spread across different sectors used to be seen as a strength and I think when it certainly does hedge the London market against overvaluation and I think that there are a number of commentators now that are worrying about overvaluation in those sectors on various markets most notably in the US.

So those sorts of things I think are all to London's credit and as you say I think the interesting and innovative reforms not least of all Pisces are very helpful to showing that the London market is a good place for growth companies as well and we're seeing some much more interest in the market from those sorts of areas.

Fantastic yeah I agree with all of that Tom. I think our time is probably up.

For our viewers if you'd like to hear more on these and related issues do visit our website www.cityandfinancial.com for more information about the summit itself, the reform of the UK public and private capital markets summit which is being held on the 5th of October. 

Just remains for me to say thank you so much for joining us today Tom. 

Thank you Maurice.