Douglas Flint – Chair of abrdn

This comes following the launch today of a report by New Financial, the influential think tank, which reveals the stark crisis facing this important segment of the UK stock market.

The report – The Future of Smaller Company Capital Markets in the UK – was published in partnership with abrdn, Euroclear, Winterflood and the Quoted Companies Alliance (QCA). Key findings include:

• Over the past 20 years, the number of smaller listed companies with a market capitalisation of less than £1 billion has fallen by nearly a third (31%) - translating into a net loss of nearly 600 companies.  
• New issues cannot keep up with the relentless pace of delistings: in seven of the past 10 years more listed smaller companies have left the UK stock market than have joined it.
• A significant factor has been the collapse in demand from UK pension funds; just one Local Government Pension Scheme has a specific allocation to UK smaller companies, compared with 18 back in 2013.
• Despite this, UK smaller companies (small caps) have delivered stellar returns over the long-term, albeit with higher volatility along the way, and added significant value to the UK economy – generating jobs and wealth in every corner of the country.
• Over 25 years, UK smaller companies including AIM (London’s junior stock market) generated an annualised total return of 7.4% in line with the S&P 500 (7.5%) and nearly 50% higher than the wider UK market (5.4%).

Recent volatility in AIM demonstrates how sensitive UK small caps are to shifts in policy and taxation. As a long-term, high-conviction investor in small caps, abrdn recognises the crucial social and economic value they bring to the UK as well as the valuable role they can play in diversified investment portfolios. As a result, it is calling for urgent measures to protect and support this segment of the market.

abrdn would like to see the Mansion House Compact – in which major pension providers pledged to increase allocations to private markets, including private equity and venture capital – extended to include listed small caps in the UK, together with infrastructure, real estate and private debt.

And while it maintains its position that stamp duty on UK shares should be scrapped entirely, it believes that extending the stamp duty exemption that currently exists for AIM to all listed companies outside the FTSE 100 could be a good starting point. This would hopefully have a direct positive impact on investment into small caps – which would then support the argument for scrapping the tax entirely.

abrdn also believes that measures to boost investment in the UK more generally are much needed and would support small caps by lifting capital flows as a whole. With this in mind, it would like to see:

• Minimum pension contributions via auto-enrolment go up significantly
• Simplification of the UK’s cumbersome ISA system to make it easier for people to engage and start investing
• A national campaign to get the UK investing
• A shake-up of financial education in schools so more people get access to it, creating the next generation of savers and investors

Sir Douglas Flint, chairman at abrdn, said: “Smaller listed companies are an integral part of the UK economy. They drive innovation and generate wealth and jobs across almost every corner of the country.

“Given that the Government is serious about boosting UK growth, we must look carefully at the small cap sector and the findings and recommendations of this report. If policymakers consider what can be done to boost investment in the UK generally, we cannot afford to ignore UK small caps.

“This segment of the market is flourishing in many respects, and, with appropriate action, it could be even more successful.”

William Wright, founder and managing director at New Financial, added: “Our report argues that UK smaller companies are facing an almost existential threat.

“There are many factors behind the decline but the collapse in demand from UK pension funds – which have increasingly switched to globalised portfolios – and the decline in demand from retail investors has been the main driver.

“Regulation, liquidity, and a low-risk investment culture have also played a role. The report calls for urgent action to support this vital segment of the UK market in the context of wider capital markets reform.”

New Financial’s report also highlighted the socio-economic value that listed smaller companies bring to the UK, as well as the stellar returns they have delivered over the long-term.

• Over 25 years, UK smaller companies including AIM generated an annualised total return of 7.4% in line with the S&P 500 (7.5%) and nearly 50% higher than the wider UK market (5.4%).
• UK small caps are much more evenly distributed across the UK than FTSE 100 or FTSE 250 companies, which tend to be clustered in London and the South East.
• They have combined revenues of £170bn and employ more than 1.1 million in the UK and overseas.
• Companies listed on AIM made an economic contribution of nearly £70bn to the UK in 2023.