Inside the ‘arms race’ for a private stock exchange – and why it’s dividing the City

At a private workshop at the London Stock Exchange in September, a room full of investors and City bosses were split into separate groups and told to talk amongst themselves.

Spread among them were officials from the Treasury, the Financial Conduct Authority and the London Stock Exchange, scribbling down the thoughts of those speaking and trying to prompt and probe the discussion in certain ways.

The boss of the exchange, Julia Hoggett, and capital markets guru, Mark Austin, had just posed a series of six questions to those in attendance with one overarching aim: how can we create a new private stock market that works?

“There is a bit of an arms race around figuring this out,” said one executive in attendance. “Everyone’s trying to figure it out, and it’s an exceptionally hard problem to solve.” 

That meeting has helped shape the government’s plans for its new private stock exchange framework ‘Pisces’ after months of delay and hand wringing since it was initially tabled in 2022.

Some in the City had raised concerns that the appeal of a private exchange would be eroded by cumbersome red tape that would make it indistinguishable from listing on the public markets.

While an initial consultation on the plans closed in April, the fact that such a listening exercise was taking place months later points to the scale of the challenge for the Treasury. 

As City AM revealed today, the Chancellor will now bring forward legislation for the new market in May next year to allow companies to trade their shares periodically without the rigmarole of an IPO.

Crucially, they will also have control over who buys their shares and how often they are able to trade them.

The plans, first drawn up under Jeremy Hunt, have been tweaked and taken forward by the current government. The City minister Tulip Siddiq said on the morning of the Capital Markets Industry Taskforce in September that it would “help investors to invest in exciting private companies and support innovative companies to grow – and ultimately to an IPO”.

However, not everyone is convinced that the plans will have their desired effect. Some say the market could in fact eat away at the incentive to float at all and dent the pipeline of companies looking to list on London’s junior stock markets, AIM and Aquis.

“Pisces will certainly boost the UK’s capital markets, although not in the way the government hopes,” said Myles Miston, the boss of Globacap, which is hoping to set up a private market under the Pisces framework. 

“Greater access to liquidity will support private firms in scaling up and growing while helping investors realise their gains sooner, as it will be easier for them to find buyers for their shares.

“However, the burden of a public listing will still act as a deterrent for many companies, so PISCES is unlikely to deliver a strong pipeline of IPOs as intended.”

This, Miston argued, will eat into the appeal of AIM just as it needs a boost. AIM has been plunged into the doldrums in the past two years and the number of firms has cratered to around 700, down from a peak of 1694 in 2007.

The argument goes that if you offer growing firms a route to raise capital that doesn’t require listing on a stock exchange, they’ll take it.

“Given that PISCES serves as an alternative to more heavily regulated stock exchanges, there is a reasonable concern that platforms like AIM might perceive it as a competitive threat, potentially affecting their market position,” added Douglas Grant, chief of Manx Financial Group, a London-listed financial services firm.

There is also the question of whether London’s Pisces market is indeed a world first. A number of firms offer comparable private trading venues and have taken issue with the framing of the new market by the Treasury.

The argument from No.11 is that this is the first time a specific regulatory rulebook will be carved out and legislated for, under which private companies can set up their own venues. The London Stock Exchange is drawing up plans for a proprietary ‘Intermittent Trading Venue’ for instance.

Even so, it has ruffled feathers.

“‘World first’ is a bit much mind,” said Ben Weaver, boss of Asset Match, a London-based firm which allows investors to trade shares in private companies.

“Here at Asset Match Limited we’ve been running periodic auctions in the shares of private unquoted companies for 12+ years.”

Nasdaq private market offers a similar secondary trading venue for private companies in the US, and since the Treasury announced its initial plans in 2022, Dubai Financial Market has launched plans for ARENA, a platform for “initial private offerings”.

The government’s plans have set the stage for a debate over Pisces. But even with its faults, many see it as a step in the right direction.

“It is all part of enhancing London’s position in the global financial market, demonstrating innovation and encouraging companies to engage with a broader range of investors,” said Charles Hall, head of research at Peel Hunt. “A vital aspect is to increase the overall demand for UK assets to ensure vibrant private and public markets in the UK.”

Reeves will look to lay out a more positive vision for the City as she addresses bosses at Mansion House tomorrow, pledging everything from payments shake-ups to pension fund reforms. 

Whether she has answers on the questions dividing the City on Pisces, however, is yet to be seen.