Hello everybody, welcome to the latest edition of C&F Talks in which we interview speakers at some of our upcoming events, and today we have with us Claire Sudden-Spears who's the Co-Head of Equity Market Solutions at Rothschild & Co and also Chair of TheCityUK's Capital Markets Group. Claire is going to be speaking at our International Capital Markets Leaders’ Summit which is taking place as part of City Week at the Guildhall London on the 20th of May. Claire, welcome.

Thank you very much, Maurice.

Very good to have you with us. Let's turn to our first question.

As a leading equity capital markets practitioner how do you account for the relative demise of the London equity market? Has this been a long process or is it something that's happened in a shorter time frame and have there been any externalities involved such as Brexit or has it been intrinsic to the markets themselves and due to our relative lack of competitiveness?

So firstly Maurice, there's some fairly strong words that have been used there. Demise, for example, is something that I would disagree with. I certainly feel that the nature of the London market has unquestionably changed and its position in the world but when you actually look at what's happened, and it is a long gradual process, if you actually look at what's happened, if we look back 20 years ago the London market was definitely at a pivotal point in terms of being a sort of international focal point for a lot of global businesses that were seeking to raise international capital.

So, if you think about it, you know, companies from the Middle East, companies from Asia for example, all needed access to international capital and the London market was one of the major international financial centres that provided that. What's happened certainly over the last decade, is in a lot of those geographies they've all developed their own domestic capital markets. So, certainly when you look to the Middle East, if you look to India for example, China, there have been vast significant changes in their own domestic sort of capital markets which actually mean that there's a lot of international capital and domestic capital available at home and they certainly don't need the sort of international markets to necessarily provide that anymore.

I mean in some cases when there's more global businesses, yes, but for the more domestic businesses they tend to prefer to raise that sort of money back home. So, the role of the London market, and the same is true for other stock exchanges as well, has fundamentally changed in terms of what is it actually serving. So that's one element that's changed.

Clearly, we're at a different point in terms of the economic cycle, so certainly if you look at the market's activity globally, we're at a lower point than we have been in the past, so again that tends to exaggerate in terms of how people feel about activity levels in the market. But also, I think we've got to think about the fact that there's been sort of very significant shifts in terms of the investor landscape over the last sort of decade or more as well. So, the rise of private capital for example, I mean that has fundamentally changed.

Companies are staying private for longer, you know, if you look back, you know, 10 years ago companies probably on average were sort of, you know, four or five years private before they became public. Today that's 10 years plus, in a lot of situations. So, the whole nature of private capital versus public capital has changed.

The makeup of public capital has changed, you know, active fund managers are now a smaller proportion of the market versus passive fund managers for example, index funds etc. So, when we talk about the sort of the London market landscape, and as I say we'd be having a similar conversation if we were talking about, you know, the European exchanges, to a certain extent the US market, although that is a different beast, you know, fundamentally just the makeup and nature of capital markets has changed. So, and that's been a gradual evolution I would say.

Yeah, and I think that's all very fair, you know, and in terms of the word I use, I mean that's where the relative demise is something which I guess has appeared in the media, and the media tend to connect the performance of the London Stock Exchange with the viability of London as an international financial centre.

But is that fair, you know, to what extent is the performance of the Stock Exchange a key component without which the rest of London as a financial centre will have problems, because after all we've got many strengths in debt capital markets which are doing rather well, banking derivatives, forex, insurance and asset management to name but a few, and of course the private equity markets which you refer, which is very significant in the UK. So, is the Stock Exchange and its performance pivotal to the continued success of the City of London?

Look, it's an important part of it, but it isn't the only part of it, you know, you just highlighted a number of other really important components of why London is relevant and will continue to be relevant.

So, you know, it is important because it's often, it's the public face often, and it gets a lot of profile, but it isn't by any means the only measure in terms of the activity levels and the relevance, if you like, in terms of the London market. I mean the other thing that I would say as well is, you know, the capital market also becomes really important not just in terms of where does it fit within the financial services space, if you like, but also where it fits within the economic makeup in terms of the UK market. I mean fundamentally for me, actually what the Stock Exchange, what the financial centre should serve is actually being part of the industrial growth strategy for the country.

I mean so, you know, so it has a number of different roles I think to play, which means that it is still critical and that activity levels and scale, if you like, of the listed equity market is only one measure of success.

Yeah, yeah. Yeah, I think that sets it nicely in context. The relative hysteria over the London Stock Exchange seems not to be balanced.

Do you think that part of the problem though for the exchange is that many of the companies listed there are from more mature industries and that they're not so much high-tech, high-growth companies. Is it this that's caused some of the relative underperformance? You had compared the Dow Jones, for instance, Nasdaq, and is this also a factor that deters technology companies from listing here and encourages them to go to the US, do you think?

Yeah, I mean again the term relative underperformance is interesting in terms of how do you measure that.

So often people look at the relative valuations, if you like, of these markets and sort of say, well this market is more highly valued on a P basis, for example, versus another one and therefore one is better than the other. As you've said, that is because fundamentally the constituency of those markets is often very different. So, you know, yes to the extent that you have higher growth, higher risk, more highly valued businesses, that's going to skew those relative valuations.

What it doesn't mean, and often this is where people, you know, become confused, what it doesn't mean is that, you know, the same business is necessarily going to be valued at a higher level on one exchange versus the other. That's not how global capital works, you know, fund managers are very global in their nature and increasingly so, so it doesn't mean that they'll suddenly pay more for a company on one exchange than it will on another. So, it is often about the sort of different makeup of those businesses and it's certainly fair to say that there has been a trend for higher growth businesses tending to go towards the US markets because there is seen to be more experience, if you like, in terms of being able to understand and value those businesses.

They have a longer track record of doing so, but that doesn't mean that some of those businesses can't be successfully listed, whether in London, elsewhere in Europe or on other exchanges, it's just that that knowledge base and experience is still developing in a lot of those markets. And certainly when you look, and it's not a one-way bet either, because it's certainly fair to say that high growth businesses, with the exception of the Magnificent Seven, the high growth businesses, not all of them have performed well, even in the US market. So, you know, again, it's not a, it's very easy sometimes to make sort of simplistic judgments around one being better than the other or high growth being higher valued, because it's all very case by case.

And so, decisions always need to be taken in terms of what is the right decision for a specific company, what is the right venue, the right target investor base, where are they going to be best understood? And that's very specific, there's not a simplistic answer to that. And it's not a one size fits all sort of answer at all.

Yeah, no, no, I fully accept that.

I mean, there's one particular issue there that I, which doesn't really get quite so much coverage when people talk about the situation. And that's really remuneration and relative pay say, what is culturally acceptable in the UK versus in the US? I've spoken to a number of founders of high-tech companies looking where they want to list. And one of the key reasons for them making that particular selection is that in the US markets, they're able as they perceive it to be paid for what they're really worth.

And that is more problematic in the UK, it's less acceptable to institutional shareholders than to be paid at the same sort of level. To what extent do you think that affects the choice of listing for high-tech companies?

For some businesses, it does, it does factor into their decision making without question, not for all, but certainly for some. You know, I think it is fair to say that there tends to be a culture of having a negative gut reaction to well paid, highly paid sort of executive remuneration.

But actually, when you drill down, a lot of investors actually are very happy to pay well for people that are performing well. So actually, I think it's more, we probably need to change the culture to think more about is remuneration aligned with performance? Because actually, if companies are performing well, they will tend to be also delivering better returns and performance for their investors and shareholders, as well. And so as long as you get that alignment, actually, the quantity of remuneration probably isn't the most important factor.

It's more about alignment. But again, I think it's, it's sort of changing, you know, probably the thinking and the culture in terms of the way that we look at that. And, you know, the sort of capitalist US markets, naturally sort of seem to be more comfortable with that than we've certainly seen in the European markets.

I think slowly, that is changing. But without question, there's still a lot of focus on that.

Yeah, very, very interesting. You're right. I mean, there are cases in the media now where we're seeing people beginning to be paid, it would seem, more like the US levels of remuneration.

Finally, if I may ask that, obviously, there are a lot of initiatives underway in the UK to, if you like, improve the standing or the functioning of UK equity capital markets. Do you think that they are enough, in aggregate, to deal with the current situation, and to ensure that UK equity capital markets are fully competitive internationally?

I think it's still a work in progress. I don't think that there is a, there's not a single answer to this. There's not something we can suddenly do that is going to sort of change and develop the market overnight.

So, I think it has to be a combination of factors. Clearly, there is a lot of regulatory change that is already happening. That's positive. That by itself, I don't think is necessarily going to be the whole solution. So, certainly, the listing rule changes that are already being put through will make it easier for companies to list here, and will make it easier for companies to remain listed here, and to be listed, and to carry out corporate activity. So, that modernisation, if you like, in terms of the rule books, definitely helpful.

There's the latest consultation that's come out around looking at payment optionality in terms of enhancing the sort of investment research piece, again, is another important part of the jigsaw puzzle. So, that's another positive. Fundamentally, what we need to see is more capital coming back into the markets.

It is more liquidity we need to see in the markets, both institutional capital and retail capital coming back into the market. So, you know, changes there that are still a work in progress. You know, the mansion house compact, for example, you know, we need to see more development of that and being able to, if you like, unlock some of those sources of capital to see coming back into the listed market.

So, I think it's, you know, it's a combination of all of these factors added together that over time are going to make for a more fertile market rather than just, you know, one single answer.

Yeah. Yeah. I'm sure you're right on that. And let's hope that all of these measures in time do have that effect. Claire, thank you for that.

For our viewers, if you'd like to hear more on this topic and to hear Claire and line up the exceptional lineup of speakers we have at the International Capital Markets Leaders’ Summit, it's being held in London at the Guildhall as part of City Week on the 20th of May. So, we very much hope you'll be able to join us there in person, www.cityweekuk.com. There you will find all the information you might need.

So, it just remains for me to say, Claire, thank you so much for being here today and sharing your thoughts with us.

Thank you very much.