Commentaries - Andy Crossley

Head of UK Small Companies, INVESCO Asset Management Ltd

Why London? - Why R&D-heavy European businesses are funded by London Investors

R&D-based businesses

A perception has existed for a number of years that technology companies and R&D-based businesses generally, have been ill-served by the UK’s public equity markets. This perception often co-exists with a belief that the British are a nation of great inventors but whose skills are matched only by their ineptitude at commercialising inventions. This view holds that engineers and scientists are esteemed less highly by British society than solicitors and bankers. Generally, inventors are seen as slightly amusing, whilst Sir Richard Branson is seen as the real hero.

However, as in so many aspects of life, perception lags reality. London, as a financial centre, has long been supportive of R&D-heavy businesses. Stocks such as Racal, Vodafone, Glaxo, Wellcome and Psion have been well supported and well funded by London investors for many years and the number has been growing. For example, there has been a big increase in the number of UK listed companies in the R&D-heavy sectors such as pharmaceuticals, software & IT services and IT hardware: the 2001 R&D Scoreboard has 36% more companies than the 1999 Scoreboard in these three sectors.

London’s role as funder of R&D-heavy businesses

A number of other factors indicate that London’s pre-eminent role as a funder of R&D-heavy businesses is being consolidated.

These include:

The success of the techMARK section of the London Stock Exchange and the Alternative Investment Market (AIM). These markets have introduced listing requirements more appropriate for emerging technology businesses, they have focused investor attention on these businesses through the creation of appropriate benchmarks and raised London’s profile as the place to list R&D-heavy businesses.
Specialist venture capitalists have brought many biotechnology companies to market and those now listed in London include Oxford Glycosciences and Cambridge Antibody, both with market capitalisations of around £500m.
The difficulties faced by the other European secondary markets (Neuer Markt, Deuxiemme Marchee, etc) suggest that the intellectual infrastructure that exists in London cannot easily be replicated. Specifically, this infrastructure includes a deeply engrained equity tradition stretching back hundreds of years: an international trading culture — the London Stock Exchange is the most international exchange in the world in the most cosmopolitan city in Europe; protection of minority shareholders combined with successful self-regulation through the Takeover panel; strong corporate governance, accounting disclosure, compliance and regulation.
More money is managed out of London than any other European city, the second largest is Edinburgh. More international money is managed out of London than any other city in the world. This liquidity is most easily accessed through a listing on a UK stock market.
The UK also has the largest pool of private equity capital available for investment in R&D based businesses. 3i, Europe’s largest venture capitalist, announced that nearly half of its new investments made in 2000 were in technology businesses. The UK accounts for 49% of the European venture capital industry; in 2000 £1.5bn was invested by the industry in high technology companies.
These factors all become self-reinforcing. The network benefits include that of liquidity following liquidity; that the pool of existing talent encourages new firms to choose to set up in London and that the creation of new firms and the growth of existing firms encourages the movement of talent to London; that the clustering of brokers, bankers, corporate-financiers, corporate lawyers, financial PR, venture capitalists, financial journalism and fund managers lowers the cost and increases the benefits of doing business in London.

The future

London may not have the vast liquidity nor the sheer scale of the US capital markets, which offer an unrivalled degree of specialisation. However, I would argue that London is now the obvious place to list for those European businesses for which the domestic stock market is unsuitable, either because it does not provide the required profile or liquidity, or there is insufficient local understanding of the sector in which the company operates. For example, Baltimore Technologies and Parthus are listed in London, Nokia is dual listed and a number of Israeli high technology businesses have chosen to list in London. London should also be the first port of call for pan- European businesses which, arguably, have no domestic stock market.

Progress so far has included a very successful start for techMARK which, after one year, had 240 companies with 74 additions during the year — over three quarters of techMARK companies are in software, pharmaceuticals, health and IT hardware. A total of £11bn was raised by techMARK companies in its first year and the techMARK 100 index increased by 47% over the year. Since 1995, 850 companies have used AIM as a vehicle for growth and have raised £6.5bn on the market. The total market capitalisation of AIM companies was £13.3bn by April 2001 and there were almost 50 companies in pharmaceuticals and software.