Hello everybody, and welcome to the latest edition of C&F Talks. Where we interview speakers at some of our forthcoming conferences. Today, Charlie Lytle, Chairman of Corporate Broking at Goldman Sachs is joining us. Charlie is going to be speaking at the International Capital Markets Summit, which is taking place as part of City Week at the Guildhall, London on the 20th of May.

Charlie, welcome.

Thank you Maurice, and thank you very much for the opportunity to speak then, and on this recorded call.

It's our pleasure to have you with us, Charlie.

Turning to the first question, to what extent do you think that the slowdown in net equity issuance, not just in the UK but in other international markets, is due to the growth in private equity as a viable alternative in terms of providing growth capital to technology and other high growth businesses? Is there simply less pressure to go public or less incentive perhaps?

Yeah, it's a really good question. I think if you look over a 30 or 40 year perspective you can see different capital providers coming into the market and private equity is probably the most well-known of those, but of course there are also venture funds as well and I think, young businesses have opportunities to go to private capital providers in a way that they probably couldn't have done 20 plus years ago and both those markets have been growing.

Of course, in the last couple of years through a combination of some of the returns which were pretty negative in VC land and also the rising interest rates, it's become a little more challenging for some of those private capital providers but they're here to stay and I think they will provide an alternative to the public capital markets for some time.

Maurice

I've seen a lot of debate about whether there's a level playing field between the public and the private markets. Do you think that some of the disclosure requirements, particularly say in relation to ESG, are too burdensome for listed companies and if there isn't a level playing field what might be done to address this?

I think this is a huge topic, and I'm certainly of the view that the levels of disclosure have risen very significantly over the last 15 years or so. You know, I was recently sent a report on accounts by a client of mine that ran to 600 pages, well nobody's going to be reading those and the effort time and cost to put together a document like that is enormous and obviously a great burden.

What I worry about, and this isn't just confined to the public private markets discussion is, that the burden that sits on companies and enterprise is rising all the time often for very good reasons and you know well-meaning reasons in the first place. But obviously the more disclosure and cost that is built in the less efficient these businesses can be.

Trying to deal with your question very specifically, ESG is one area of disclosure that has risen over the last 10-15 years but there are others as well as you know various regulators seek to protect customers or interest groups and I think you know we should be looking at these things in a wholesale way. There's definitely an attempt to try and reduce some of this from some regulators, and you know, part of the changes to the listing rules and reforms that will come through will obviously help on that. But I think we all collectively need to work on it too, that's on both the buy side, and on the investment banking side, to just avoid ourselves you know ending up in a morass of paperwork.

Yeah, there's a real danger of that isn't there.

There's a widespread view in the media that shares on the London market tend to trade at a discount to other markets, you know, why is this? Do you think that eventually investors will be drawn back on the basis these shares represent comparatively good value, or are we going to see more companies change their listing to another venue and/or more take private deals?

Well, it's a very interesting question but it's a question interesting you pose partly in the presumption that this is the case. I'm indebted actually to my colleague, Sharon Bell, who's one of our strategists who published an excellent note, Europe chasing the American dream earlier this month and in that she's gone through and addressed a number of these issues.

So, just to give a couple of facts that the P in Europe is currently around 13.7 versus 21 in the US, so on face value the multiples are different. But that's actually largely a function of sector growth and risk, and you know, what that translates into from a market premium perspective is this is the highest level of value dispersion there's been since the global financial crisis is currently running at about a 25 percent, versus 10 percent value difference over the average period of time. And actually, in the last four or five weeks we've seen some reversal of that and so the numbers I’m quoting are really the end of March, let's not get carried away by one month of data but the two largest IPOs in the world are taking place in Europe at the moment.

CBC there has been a significant shift I would say there is a very substantial shift into investor sentiment I think we're seeing a number of investors particularly in North America looking at Europe at the first time, in a way that certainly I haven't seen in the last couple of years. It's all quite nascent so you know we shouldn't get over excited but you know Japan was in the vector for 20 years and it's become one of the hottest markets in the last 12 months.

So, I think, you know, we may be close to an inflection point in terms of relative valuation let's see how the future plays out. And you know I think it is difficult to break the umbilical cord that has existed between high performing US markets and the rest of the world over the last few years and that we tend to reinforce our own behaviour.

But I think that's something that is worth digging into, and just to take the famous Magnificent 7 you know Tesla's down 40% this year that's quite a big fall, NVIDIA was down you know over 200 billion in one day last week. you know. things can change quite dramatically and I'm not calling time on the US markets, but I certainly think that there's a recognition of the value that exists in Europe at the moment which we're seeing a number of investors look to participate.

Yeah, because there's so many very good opportunities on there in Europe at the present time.

Looking again at technology companies though, you know I've chatted to a number of founders of tech companies who are considering their options as to where to list, and the two issues that they really care about are valuations, i.e where can they achieve the highest valuation for their business when they list, and remuneration and this is that the latter isn't really something that features so much in the public discourse on this. But, how much of an issue do you think that is when founders compare a listing and say London versus New York?

Well, I think ironically actually when we've looked at the detail on this the valuation difference in technology is actually the smallest of all the sectors across Europe versus the US so actually, tech companies in Europe can trade at the same or higher valuations than US peers. The big difference is that the whole investing infrastructure and capital deployed to tech investing is far smaller here for obvious reasons, you know, when you think of the multiple trillions of value that sit in American or US tech versus those in Europe and elsewhere in the world there's clearly a far deeper system that's investing in technology companies.

And I think the thing that you know is it is attractive therefore to management teams is that when they go to a particular market they get you know a better hearing and apparently deeper understanding of their businesses than they might elsewhere and of course you know that becomes self-reinforcing we've seen that in healthcare and we've seen it in tech you know go back 15 years London was the capital of resources, and you know people came to London they spent time with experts in mining oil and gas and other sectors and it just turned out that that was not a sector that had the same growth characteristics and opportunities as some of the others.

So, I think it's if you try and answer the question narrowly it's a bit of a myth, but I don't think you can dismiss the fact that there's just a far greater basis of investing in tech and an understanding of that in the US.

As to remuneration you know I think there has been an effort here to try and address that, you know, it goes back a little bit to the underlying capital providers in other words the pension funds, foundations, maybe sovereigns you know what do they all want but you know the irony, which is not I'm sure lost on you, Maurice, is that the same underlying capital providers can support high remuneration in certain markets because, you know that is the norm of that market.

And in Europe at the moment, you know I think we will continue to see you know lower overall remuneration partly for societal pressures but you know there are enough examples and we'll see this coming through over the AGM season with some quite high profile schemes being voted through. Most recently the AstraZeneca one you know you will see very significant shifts up in potential pay for performance and so I think that's something that can be addressed. I would say things like split voting capital are important also to tech founders, and of course the FCA is looking to address that in their reforms. But there are still points of difference and they're important to individual founders.

So, hopefully that's shifting.

Finally in the interest of time, Charlie. There are many initiatives underway to restore London's equity capital markets including the launch of PISCES the UK's crossover public private market. Do you think that PISCES will develop a pipeline of companies that go on to list in London and more generally what measure or measures do you think will help lose the dial for London?

I think PISCES is really exciting. I think the London Stock Exchange has to be congratulated in on a number of initiatives that they've sought to champion over the course of the last 18 months. Of course, at this stage you know it's unproven and will you know it will need scale and critical mass to create momentum for it. To us, there is a huge potential appetite by sponsor-owned businesses to eventually come to market.

At the moment, you know we're in the middle of the IPO of CBC by the time of the conference, obviously that that deal will be complete. But I think there is a question for a number of owners of private companies which is, you know, what is the eventual end game. And I think things like continuation funds can help some very successful private companies stay private for longer. But how many private companies are worth more than 25 billion? That's a round number how many worth more than 100 billion?

And you know there comes a point where actually even those assets that private equity would like to own forever and ever, need to find you know another market and if this is a way to help bridge that journey then that's I think to advantage for public market participants. And I think you know that there will be more migration from private to public than probably feels today like there will be over the next few years because I think some of those valuation differentials that we talked about earlier will close, and I think fundamentally you know private equity needs to be returning cash to its underlying capital providers and, you know, you can't do that by continuing to own forever and ever even if you can release capital on the way through.

And there there's a huge amount of money tied up isn't there where the private equity firms are seeking to exit, so yeah, and I think that's undoubtedly true. And Charlie, thank you very much for sharing those thoughts. For our viewers, if they'd like to hear more on this issue and related issues, please do attend in person the International Capital Market Summit which as I mentioned at the start is taking place as part of City Week at the Guildhall London on the 20th of May.

Further details available on www.cityweekuk.com - so just remains for me to say thank you very much Charlie, for joining us today.

Thank you, Maurice, great to see you and look forward to the 20th of May.

Absolutely, thank you.