Wednesday, Oct 28, 2020
International Finance
Banking and Finance Magazine

Monopoly in investment banking

Thought_leadership_Monopoly-in-banking
Retail investors do not have fair access to primary capital market transactions that underpin corporate strategy and growth

Retail investors are often misinformed about market conditions and when it comes to engaging and onboarding—there is a lot of hard work involved. This is not only a problem for those investors who miss out on great investment opportunities, but also for listed companies that overlook the tangible benefits.

In essence, retail investors do not have fair access to primary capital market transactions that underpin corporate strategy and growth. To date, institutional investors have been facing monopoly when it comes to investing in those listed companies’ fundraises which often take place at a discount to market price.

On a rare occasion, it appears that retail investors get access to a new share issuance, and get nothing when there is a good deal to be had. Statistically, 40 percent of the market is being owned by a group of retail investors, but institutions are getting a much better deal when purchasing newly issued primary shares.

Retail investors are significant to investment market
In Europe, there are 57 million individuals actively investing in equities. Retail investors represent a significant proportion of the investment market. Last November, a study found that 82 percent of AIM stocks and 75 percent of main market stocks had an average trade size below £10,000. However, individuals on average represent 25 percent of the shareholder register on AIM, a sub-market of the London Stock Exchange.

That said, individual investors accounted for 7 percent of FTSE 100 ownership and 17 percent of the main market stock in June 2019. New research from the Economist Intell unit shows European households today own 15.6 percent of listed shares across the EU, up from 12.7 percent in 2007.

These figures clearly indicate that it makes no sense for retail investors to be excluded from the best deals offered by those institutions. Retail investors are responsible for the strong growth in individual equity ownership following the 2008 financial crisis—and yet, are overlooked during the capital formation process.

Listed companies may not realise the impact of this monopoly and the fact that they are missing out on potential liquidity. Retail investors could hold between 20 percent to 30 percent of their share register but because small stocks held by a few institutions tend to trade only by appointment, this opportunity can be missed.

So the big question is—what can be done to level the playing field for retail investors and listed companies to mutually benefit?

This is where fintechs come into play. They are democratising the financial system across a number of streams. Since the financial crisis in 2008, it was recognised that savers and individual investors need more power and better access in regard to where their money was invested.

Crowdfunding—key to democratising investments
In terms of democratising investment into companies, the first mover was the crowdfunding industry. This worked as it broke the vicious cycle of a company being refused funding owing to lack of proof of concept—but they had no proof of concept because of lack of funding to help them reach that point. With crowdfunding, the investment opportunities are taken directly to the crowd allowing startups to be able to reach their potential customer base, build a brand and establish product loyalty.

This in turn gives customers a feeling of control and removes any concerns related to their money. Initially crowdfunding started as a reward based investment, but it has evolved into an equity based investment. This was an excellent first step in the democratisation of investing. While its value is still in place it has highlighted certain unsophisticated elements of this form of investing and the lack of services out there that gave retail investors access to the public markets.

The public markets come with a number of benefits to both the company and investor that most crowdfunding platforms do not offer. Due diligence is one such benefit. Crowdfunding platforms rarely have resources to carry out extensive levels of due diligence, but companies must go through extensive checks prior to listing on the stock market. This is not the case in most crowdfunding events.

Furthermore, investors focused on crowdfunded companies are reliant on the discretion of the board to pay dividends to see any kind of return: Companies involved in crowdfunding very rarely go public and thus liquidity is hard to come by. In short, crowdfunding is not a sophisticated enough platform to bring quality investment opportunities to retail investors.

Corporations are beginning to recognise the need for democratisation of equity markets which go beyond crowdfunding. They see that retail investors bring important benefits by driving strategic objectives when raising capital for listed companies.

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