How ‘deep’ is the capital pool available to Main
Market companies, and what drives the creation of a ‘deep capital pool’? Andrew Wallace quantifies the potential investment exposure for
Main Market companies and describes some of the influencing factors.
The Main Market satisfies all the necessary criteria for claiming to be one of the world’s deepest pools of capital. And our recent research reveals that the capital pool for Main Market companies is very deep indeed. Figure 1 gives an overview of the exposure to investment assets that a Main Market company could experience.
£ 2 , , 4 0 0 b i i l l l l i i o n
£ 8 9 b i i l l l l i i o n
£ 4 7 b i i l l l l i i o n
£ 2 9 b i i l l l i o n in 5,000 pension, insurance, mutual funds and investment trusts – predominant equity holdings will be
Main Market listed. in 14 million Individual Savings
Accounts & Personal Equity Plans held by retail investors. UK equity exposure must be Main Market in 240 institutional funds explicitly benchmarking the FTSE UK Series of indices in 60 tracker funds that must have exposure to Main Market companies in the relevant index of the FTSE UK Index Series.
Figure 1: Potential investment exposure as a Main Market company. Source: London Stock Exchange research – August
2006
The figures quoted refer to estimates of UK-based institutions and arrangements that are most likely to be buying UK assets. Global investment exposure to Main Market companies will of course be far higher - non-UK based funds buying UK equity exposure will more than likely buy Main
Market stock, for example.
But what exactly are the drivers behind the development of such a deep pool of capital?
Fundamentally, a capital pool without companies wanting to participate is akin to a hole without a doughnut. Equally, there can be no capital market without investors willing to commit their capital. So the main driver for creating a deep capital pool must be to bring companies and investors ever closer together – and to attract more of both.
Bringing investors and companies closer together has one unifying factor - confidence. And building confidence in the market is itself based on many related factors beyond pure sentiment, including the number, quality and diversity of companies and investors willing to participate in the market, not to mention the sophistication and reliability of the systems behind the market, for example.
Getting that confidence factor right is what creates the momentum behind a deep capital pool.
However, there are also two other crucial factors at play here, namely:
•
The ‘appropriateness’ of the corporate governance/regulatory standards applying to the market – ‘ can I rely on standards sufficient to protect my interests without hindering them?’.
• the cost of accessing that market from either party’s perspective – ‘am I getting value for money?’

In terms of corporate governance standards, the majority of global investors now use corporate governance standards as a way to enhance longterm investment returns, mitigate risks, and provide a better picture of portfolio companies
3
.
They view such governance as an important investment consideration.
The UK’s intelligent approach to regulation and the success of the Combined Code in shaping
Board structures are key reasons why the UK (as embodied by Main Market companies) has the highest overall average rating in corporate governance quality worldwide
4
.
In terms of the cost for accessing the Main
Market, a recent report by Oxera ( The cost of capital: An International Comparison; Oxera, June
2006 ) shows that on a global stage, the
Exchange's markets are very cost effective for raising capital; the Main Market being the clear leader. Figure 2 shows how well the Main Market compares with the main US markets, for instance.
Obviously, the more cost-effective the market is to access, the greater the number of companies that will want access and the more investors will want to participate.
Main Market companies should therefore be ‘top of the pile’ for institutional investment interest, making the corporate governance standards they follow a major reason behind the depth of the capital pool available.
In summary, a combination of positive factors can explain why Main Market companies have access to Europe’s deepest pool of capital .
Andrew Wallace is the UK Main Market
Product Manager at the London Stock
Exchange with additional responsibility for techMARK and techMARK mediscience, the
Main Market segments for technology and healthcare companies.
The overall cost to access capital on the Main Market is considerably less than on the major US markets. Main Market companies benefit from:
Figure 2: Cost of capital; Main Market versus NASDAQ & NYSE
Source: The cost of capital: An International Comparison; Oxera, June 2006
3
Institutional Shareholder Service: 2006 Global Institutional
Investor Study
4
GMI - New Global Governance Ratings, March 2005