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Regardless of the ideological partipuri, politicians have a strange knack when trying to bend the dynamics of the financial services sector into their causes. First, British Labour Prime Minister Rachel Reeves, like her Tory predecessor, Jeremy Hunt, wants more growth-friendly financial regulations, and the demand for widespread reverberation of policymakers around the world.
Reeves and Hunt are also urging UK pension funds to allocate more capital to growth opportunities in the domestic private market. Both will take part in a global manual winding over a widespread decline in the number of early public offerings in the public stock market.
Regardless of its long experience, diluting financial regulations could be a potentially systematic chaotic recipe. And the government, surrounded by pension fund assets allocation, is not full of danger. Let’s start with a serious misconception of the financial system revealed by politicians’ concerns about the reduction in IPOs.
In the good old days, stock exchanges were great national institutions. IPOs were an old-fashioned step towards developing businesses and raising new capital for investment. That paradigm follows the path of telephone directories, fax machines and cassette tapes.
The stock market in developed countries has not been a significant source of funding for many years. As John Kay noted in his 2012 UK Stock Market Review, the stock market should be viewed as a way to get money from businesses rather than primarily incorporating them. In other words, it encourages the withdrawal of fledgling financial aids.
Despite the relative shrinking of the open market, access to capital is rarely a concern as the private market is expanding. With its abundant access to private capital, there is no compelling reason for them to make their financial advocates and shareholders public.
The decline in IPOs is indeed a global phenomenon that reflects the lower capital strength of a highly knowledge-based economy. Meanwhile, political concerns in London regarding the loss of IPO market share to New York should look at what it is: Atavistic Mercantilism, which has little impact on UK productivity. And many notable weaknesses in the UK’s productivity sector do not primarily lead to choices in the locations and capital market structures that we list.
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Politicians say that what is important for productivity is that the central role of the primary equity market for new equities is to raise capital for the companies already cited. In the US, UK and other major economies, growth is increasing in debt and public debt is being implemented at near wartime levels. Equity markets are important in providing fresh capital to strengthen corporate solvency and to promote Delag when the economy is hit by a regular financial crisis where it tends to follow financial deregulation.
That said, politicians are not entirely wrong in hoping pension funds will be immersed in the private market. This is where many innovations are made in areas such as biotechnology, climate change, and artificial intelligence. What is expected is that private stocks are illiquid and difficult to buy and sell. However, defined contribution pension plans members do not need liquidity until retirement is upon us. The domestic private equity exposure also provides valuable diversification from investments in US stocks, particularly passive equity funds, which are overly concentrated on large technologies.
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However, from a broader economic perspective, private market opacity poses the risk of misallocating capital. Performance figures are misleading due to a large windfall in returns earned by private equity on investments funded at oddly low interest rates following the now-defunct financial crisis. In a hangover from the boom, private equity managers are struggling to sell companies and return cash to investors.
Today, many stopgap funding is provided to them by personal trust. According to economists Leonore Paradino and Harrison Carrewic, the fast-growing private credit funds rely on bank funds, loan illiquidity, opacity of loan terms and the false maturity of investors, resulting in a unique set of potential systematic risks. Importantly, this market has never been tested in a recession.
A lesson politicians must learn is that the productive contribution of a well-functioning banking system to the economy is precisely pricing of credit and liquidity risk. We know that our debt-in-the-money economy will forever be hostage to take excessive risk in finance, as a financial crisis that follows years of mispricing of risk. Therefore, the central goal of policymakers is to minimize this highly economically costly systemic vulnerability, to extreme caution against pleas from bankers and business lobbys, and perhaps to strive for pleas for growth-friendly regulations. The benefits for taxpayers, investors and savers are far greater than those that come from politicians who play with other people’s pension fund portfolios.
john.plender@ft.com
