A Stock Exchange for Scotland: Early background research November 2018 Roger Mullin, John Millar, Michelle Thomson © Roger Mullin, John Millar and Michelle Thomson 2018 All Rights reserved. The authors have asserted their rights to be identified as the authors of this work. ISBN 978-1-68454-770-8 Published by Momentous Change Ltd Design by Saltire Graphics MOMENTOUS CHANGE LTD Authors 4 Exit strategies – trade sales 19 IPOs – the less favoured path 20 Foreword 5 Outlook 20 Chapter 1: Chapter 5: Introduction 6 Reviewing selected Advantages of having stock stock exchanges 21 exchanges 7 A modern context 21 The proposition 9 Scotland’s future 21 Sustainable Growth Commission 22 Chapter 2: A brief history Key data on exchanges 23 of Scotland’s Impact for Ireland 24 stock exchanges 10 Motivation factors for listing 25 Early share trading and the first Stock Exchanges 10 Chapter 6: The growing importance of Key Sectors 27 the Scottish Stock Exchanges, Global trends and indices 28 1840-1900 10 Maturing markets 28 The Scottish stock exchanges in the 20th Century 12 Entrepreneurship 29 A lasting legacy 14 Scotland 30 Financial services 30 Chapter 3: Energy 30 Investment management in Scotland – a global Life Sciences 31 success story 15 Food and drink 31 The origins of Scottish fund Tourism 32 management 15 Creative Industries 32 A distinctively Scottish approach National Policy Priorities 32 – long-term, responsible and engaged 16 New National Performance Framework 32 Impact investing – the next opportunity 17 In summary 33 Aligned values 17 References 34 Chapter 4: Private Equity in Scotland – Investments and Exits 18 Private equity in Scotland – CONTENTS a large and growing presence 18 3 Roger Mullin Roger is Honorary Professor at the University of Stirling’s Management School, a former member of the Sustainable Growth Commission, and a vastly experienced researcher. Before entering parliament, he undertook 27 international assignments for UN agencies, the World Bank and Asian Development Bank. Since leaving parliament in 2017 he has been appointed Chair of the Board for Revive Campaign Ltd which supports the All Party Parliamentary Group for Explosive Threats. John Millar John is a doctoral researcher at the University of Edinburgh Business School where his research is looking at a number of strategic topics relating to the Scottish asset management industry. Prior to this he worked for 24 years as a portfolio manager for two investment management firms based in Edinburgh. Michelle Thomson Michelle has a background in financial services, IT, property and the creative sector as well as a breadth of experience in private business. She was a key member of parliament serving on the Business, Energy & Industrial Strategy Select Committee, leading on a range of inquiries which achieved national prominence. Since stepping down from parliament in 2017 she has been appointed as Ambassador for the All Party Parliamentary Group for Fair Business Banking and is currently leading on their Contracts workstream. With thanks to Dr Jim Walker, Chief Economist of Aletheia Capital Ltd for AUTHORS his foreword and international insight. 4 MOMENTOUS CHANGE LTD When I moved to Hong Kong for opportunities to invest in 28 years ago it was my first step their start-up and established into the world of stockbroking. companies. Of course, I knew a bit about the ‘Dark Side’ – investment Not all are particularly successful banking and broking – from my but they all understand the three years working at a large advantage of broadening capital commercial bank in Edinburgh but, markets. By so doing they increase truth be told, I had no clue how the sources of funds for their stockbrokers operated or what domestic companies, they attract they actually did. attention and they attract foreign money. Twenty-eight years later and some parts of the broking world still Unlike these emerging markets remain a mystery to me but from Scotland is already rich and has a an economics perspective the fully functioning economy and, in benefits of functioning capital all fairness, there are a number of markets are quite obvious. rather large stock exchanges only 400 miles south. Countries with an undue reliance on the banking system – and by But that is the point. There are that I mean the companies that stock exchanges in London that operate within these countries compete with each other in the – as a source of capital find capital-raising business. Some that the entrepreneurial spirit is have specialist niches, others are suppressed and economic growth global in reach. is curtailed. From nothing in 1990 China The establishment of a stock now has three functioning stock exchange unleashes a dynamism markets all serving different that can scarcely be imagined by purposes. The Stock Exchange for the layman. Scotland need not compete with London; it can complement it and, As the authors of this report to at the same time, serve Scottish establish a Stock Exchange for companies directly. Scotland point out in Chapter 5, the economic benefits flowing from In this time of global capital flows a stock market activity are many and new Stock Exchange for Scotland well-established.It is also a chance is a golden opportunity for to put Scotland firmly on the world Scottish enterprises to make their map. mark and broaden their appeal internationally. Good luck to the Countries like Indonesia, Malaysia, venture. the Philippines, Thailand and Vietnam (my areas of expertise) Dr Jim Walker are visited by thousands of Chief Economist fund managers from around Aletheia Capital Ltd FOREWORD the world each year searching Hong Kong 5 “I would welcome the return of a Stock Exchange to Scotland especially if it returns with the highest possible emphasis on its core functions of: - raising capital, - enabling companies to buy productive assets and grow in Scotland and - ensuring liquidity... and commits itself to helping Scotland retain much more of the wealth that it generates. Jim Mather Former Minister for Enterprise Energy and Tourism Visiting Professor at Strathclyde and“ Heriot Watt universities This is the report of an initial piece School, Roger Mullin of of research commissioned by Momentous Change Ltd and Kirkman Ltd. The research for this Michelle Thomson of Momentous report was conducted in the period Change Ltd. Roger Mullin was the 9 – 20 November 2018. overall lead and editor in charge of this report. Momentous Change Ltd was invited to undertake this study An overarching aim was to explore and they recruited the assistance areas which may be followed up by of Edinburgh University Business more substantial research at a later School. Those conducting date. The expectation was this may the study were John Millar of involve the following: CHAPTER 1: INTRODUCTION Edinburgh University Business 6 MOMENTOUS CHANGE LTD n The dates of foundation and Scotland would not be able to host the securities lists of each of an effective and sustainable stock the Scottish exchanges in 1971 exchange. showing the big old names but also the sectors of industry that were publicly capitalized. Advantages of having stock exchanges n Analysis of the size and frequency of trade sales and It is probably not fully understood exits to private equity and the by the general public what the dominant role they play in the advantages are of having a stock economy of Scotland. exchange. Stock exchanges are associated with wealth creation n Evidence of entrepreneurship in and investment, but they are much globally relevant sectors. more than that. In addition to the n Evidence of leadership in buying and selling of shares in asset management and impact listed companies, stock exchanges investing - Baillie Gifford, enable businesses to access Standard Life and Alliance Trust. capital and the opportunity to enhance their public presence. n Academic support of the growth Where there is intelligent economy by leading business leadership, businesses can use schools, ICAS, Law Society of the opportunities stock exchanges Scotland. bring, to grow and enhance their n Reference to Ireland and others companies. The financial and such as Portugal. regulatory costs involved can be seen as a good investment in While this report cannot claim to creating successful businesses of provide the last word on any of scale. these and related areas of interest, this short study has already begun Blissett1 has argued, for example, to highlight why reintroducing a that six of the main benefits to stock exchange, built on modern a business of a stock exchange lines, with a keen interest on listing are: impact investing, will be an n Access to capital important initiative for Scotland. It is interesting to note the range of n Enhanced profile supporting quotes we are able to cite in this report, as testimony to n Ability to attract better the goodwill that exists towards employees this initiative. n Increased visibility Some areas of research, such n Ability to maintain control as the views of a range of professional bodies, will require in n Reduction of the cost of other depth interviewing at a later stage. capital Others, such as performance issues in other exchanges will As we note shortly, the proposed require much greater data analysis. new stock exchange for Scotland, However, we believe this short will also have the additional drivers report already provides much of being able to invest in ethical, evidence that should dispel sustainable investments with any thought that, given good good corporate governance. This, leadership and management, arguably, is of growing relevance 7 “Across the country Scotland historically had quite a number of Stock Markets. When they closed organisations not only lost the ability to raise funds locally – we also lost the local infrastructure in the form of corporate financing and the legal services. I welcome this announcement and am delighted to see the plans for it to be headquartered in Edinburgh – the largest UK financial centre outside of London.