Report: the value of capital markets to the UK economy
May 2020 • Rebooting UK capital markets post Brexit • by William Wright & Eivind Friis Hamre
This report shows that capital markets have a vital role to play in supporting the UK economy through the Covid crisis and driving a recovery. The report identifies 1,000 large UK companies that use the capital markets to support their day-to-day business, raise capital, or manage their risks. These companies employ nearly six million people in the UK and represent nearly 90% of UK firms with revenues of more than £200m.
New Financial is a social enterprise that relies on support from the industry to facilitate its work. If you would like to request a copy of the full report, please click here and you can download the accompanying infographic here.
In more normal times, capital markets channel investment in the UK economy to help finance companies and drive growth, investment, jobs and prosperity. They diversify the range of funding for companies, complement bank lending, and expand the overall availability of finance to the economy. In the wake of the economic shock of the Covid crisis, this function is even more important: capital markets add flexibility, capacity and fast access to billions of pounds for companies.
People working in the industry understand the vital role that capital markets play in supporting the UK economy and how capital markets can help drive an economic recovery in the wake of the Covid crisis. The big question is: how can the industry better communicate this value to government, policy makers, and the wider public?
Our latest report in collaboration with BNP Paribas The value of capital markets to the UK economy analyses how relevant capital markets are to UK companies and the central role they play in supporting the wider UK economy.
Supporting the wider economy
This report shows that capital markets play a central role in the day-to-day functioning of the economy: we estimate that more than 90% of large UK companies use the capital markets to raise capital, invest in their business, or manage risk. These companies have a huge impact on the wider economy and employ nearly six million people across the UK (another seven million people around the world).
The most obvious value of banking and finance to the UK economy is that the industry employs more than 1.1 million people across the UK (two thirds of whom work outside London) and generates more than 10% of UK tax receipts. However, this report measures that value in terms of the industry’s customers: what proportion of large UK companies use the equity, bond or loan markets, and how much capital have they raised? What proportion of companies have been backed by private equity or been involved in mergers and acquisitions? How many of them use the derivatives market to help manage their day-to-day risks? And how many people do these companies employ in the UK?
The report underlines how relevant capital markets are to the ‘real’ economy and measures the direct economic contribution that companies that use the capital markets make to the economy in terms of employment and investment. We think it’s the first attempt to analyse the impact and value of capital markets in this way, and we hope it provides a useful starting point for the discussion on how the industry can help support the economy through the Covid crisis, help drive a recovery, and help ‘level up’ the regional economy across the UK.
Here is a short 10-point summary of this report
1) The relevance of capital markets to UK companies: capital markets may seem abstract and remote from the day-to-day business of UK companies but we identified 1,000 large UK companies – or nearly 90% of all UK companies with revenues of more than £200m a year – that used the capital markets between 2014 and 2018 to raise money or help manage their risks. Many of these companies have already received or will rely on funding from the capital markets (in addition to bank lending) in the wake of the Covid crisis.
2) The value of capital markets to the UK economy: large UK companies that use the capital markets play a vital role in the UK economy. They employ nearly six million people in offices, factories, plants, shops and outlets across the UK – around one fifth of the private sector workforce – and a further seven million people overseas. Their combined revenues of £3.1 trillion are 50% bigger than the size of the UK economy.
3) Capital markets and smaller companies: capital markets are not just for big multinationals. We identified 14,000 smaller UK companies that use the capital markets – including around 900 smaller firms listed on the stock market – who between them employ more than two million people in the UK.
4) The stock market and the UK economy: nearly half of all UK companies with revenues of more than £200m are listed on the stock market. These 500 companies employ more than 3 million people across the UK and are worth a combined £2.7 trillion. Over 40% of these companies used the stock market to raise nearly £120bn. Since the middle of March nearly 100 UK companies raised £5bn on the stock market.
5) The bond market and the UK economy: more than a fifth of large UK companies (excluding financials) used the corporate bond market to raise £270bn, and these 230 companies employ around 2.3 million people in the UK. Nearly 200 companies used the leveraged loan market to raise another £215bn. Since the middle of March nearly 50 UK companies have raised around £25bn in the corporate bond market.
6) M&A and the UK economy: nearly three quarters of large UK companies used the M&A market either to buy another business, or to be acquired by another company, or sell part of their business. These companies employ nearly 5 million people in the UK, and a further 13,000 smaller companies were involved in M&A activity of some form. M&A will be a vital part of company restructuring in the wake of the Covid crisis.
7) Private equity and the UK economy: private equity has become an increasingly popular source of funding for UK companies. Nearly a third of large companies in the UK have been involved with private equity in some form over the past five years (either owned by private equity or acquired or sold by a private equity firm) and these companies employ just under two million people in the UK.
8) Derivatives and the UK economy: trading floors at big banks in London may seem a million miles away from the ‘real’ economy in the rest of the country, but more than 80% of large UK companies use derivatives in some form to help manage the risks in their day-to-day business, according to our analysis of annual reports. Derivatives are particularly valuable in the sort of volatile markets we have seen over the past few months.
9) Pensions and the UK economy: the most direct connection between the capital markets and individuals is their pensions. Large UK companies contribute around £25bn a year to their employees’ pensions with an average company contribution per employee of around £2,400 a year. Large UK companies have combined defined benefit pensions assets of around £750bn, which aggregates the pension savings of millions of people into a valuable pool of capital that can be put to work in the economy.
10) Framing the discussion: the banking and finance industry is an important economic sector for the UK in its own right, but its real value is the underlying role that it plays in oiling the wheels of the wider economy and helping companies and individuals raise capital and manage risk. This report underlines the importance of the capital markets to large UK companies – and to thousands of smaller companies – and the vital role they will need to play in supporting the UK economy through this crisis and in driving more long-term investment across the UK to fuel a recovery and boost productivity and growth.
The report analyses the value of capital markets to the UK economy through the lens of how large UK companies with revenues of more than £200m use six core sectors of the capital markets: the stock market and equity capital markets, corporate bonds, leveraged loans, M&A activity, and private equity. It also analyses how they use the derivatives markets and the role they play in pensions. We excluded overseas companies even though they employ millions of people in UK because the connection between their use of capital markets and their activity in the UK is harder to quantify.
We built a dataset from the bottom up of UK companies with revenues of more than £200m (including publicly-listed and privately-held firms) from a range of sources. We then mapped these 1,160 companies against data from Dealogic and the London Stock Exchange to measure how many firms used the capital markets in the five years between 2014 and 2018. For derivatives and pensions, we analysed the annual reports or company accounts across a sample of nearly one third of these companies.
From this we calculated the relevance of each sector of the capital markets to large UK companies, and their impact on the UK economy in terms of how many people these companies employ in the UK and the value of capital and investment that they put to work in the UK. We also analysed the role that capital markets play for around 14,000 smaller companies.
We would like to thank Dealogic for providing much of the data in this report and Eivind Friis Hamre for doing the heavy-lifting on the research; BNP Paribas for supporting this important project; and our members for supporting our work. We welcome feedback on our approach and conclusions: to email us about the report, click here. We apologise for any errors, which are entirely our fault.