It has escaped the notice of few in the City that companies are shunning the option to list on the London market, choosing instead to remain privately owned and/or attract investment in other ways.
In 2024, just £777.7m was raised by companies listing on the London market, according to consultancy EY, amounting to an 18.3% year-on-year decrease from the prior year.
This was against a global year-on-year decrease in volumes of 4%, EY said.
Some 88 companies delisted or shifted their primary listing from the London Stock Exchange’s main market, EY said, with businesses citing falling liquidity and weaker valuations compared to competing locations.
Government, regulators and City institutions realise this rot must be stopped and have been cooking up a range of schemes to do so.
A fishing expedition
One of the latest such schemes is the Private Intermittent Securities and Capital Exchange System – or PISCES – that will allow investors to buy and sell shares in private companies with relative ease compared to the current process.
In her November 2024 Mansion House speech, Chancellor of the Exchequer Rachel Reeves pledged legislation for PISCES by May 2025. The Financial Conduct Authority had already set out its plans for the platform at the end of 2024 and is currently consulting on its regulatory framework.
In the spirit of fostering innovation, PISCES will operate under the FCA’s ‘sandbox’ environment, and the government will be allowed to make temporary changes to primary legislation over a period of five years and ensure its theory works in practice.
Furthermore, the trading of shares of PISCES companies will be limited to a defined group of investors including institutional investors and high-net-worth individuals.
Although starting out in this limited capacity, the FCA believes PISCES could inspire some companies to change their positions on going public. The platform “will offer investors more access and a greater confidence to invest in private companies and could act as a steppingstone to public markets for those firms”, the watchdog’s interim executive director of markets Simon Walls said in December.
Yet, for those looking for a real transformation of London’s – and the broader global – capital markets, experts believe that the sandbox approach could provide a fertile testing ground for PISCES, as well as innovation in digital assets.
The FCA has also said it is receptive to using its sandbox to develop fund tokenisation.
Playtime
The previous government published its response to a consultation on the regulatory framework for PISCES in March 2024, in which it acknowledged that the proposal and design of the sandbox was well received.
Most respondents supported the five-year timeframe, and while some wanted a shorter period of two or three years, most acknowledged that the government could make the modified legislation permanent before the end of the five-year window.
A small number of respondents sought more detail on how the Treasury will support the shift from the sandbox environment to the permanent regime for PISCES, along with the winding-down arrangements for participants looking to exit the test phase.
But there is enthusiasm for PISCES. “Respondents said it would reduce the regulatory jump between private and public markets and support private company growth,” the government said in November in its response to a subsequent consultation. “Given the novel nature, respondents agreed that a sandbox was an appropriate mechanism to develop and test this regulatory regime.”
The government has pledged a smooth transition out of the sandbox, emphasising that modified legislation will only apply to sandbox participants and those connected to trading activities on an approved PISCES platform.
Lessons from the Sandbox
The PISCES sandbox is the second example of the use of such an arrangement. The ‘Digital Securities Sandbox’ (DSS) was launched last year and has the FCA working with the Bank of England on its development.
The DSS allows participants to use emerging technologies, such as distributed ledger technology (DLT), to conduct activities normally associated with Central Securities Depositories and trading venues.
Three companies – ClearToken, Montis Digital UK, and BPX Markets – have been given the green light to operate in the DSS, although have not yet reached the required status to carry out live business as an authorised operator.
“We would certainly expect lessons learned during the DSS to influence FCA guidance on the new PISCES platform,” law firm Blake Morgan partner Martin Kay tells Capital Pioneer.
The FCA has acknowledged the importance of ensuring flexibility in the new PISCES regulatory regime, Kay observes. The watchdog’s disclosure and market abuse requirements are being addressed with flexibility in mind, he says.
The DSS has used technology such as DLT when issuing, trading and settling securities such as shares and bonds, Kay continues, demonstrating “how decentralised systems can increase transparency and improve the speed of transactions,” he says. “We anticipate managed integration of DLT into the PISCES platform.”
Providing a safe environment for companies and regulators to experiment has its supporters among existing proponents of investment in private companies.
Cees Vermaas, chief executive officer of The International Stock Exchange (TISE), a Guernsey-headquartered exchange for public and private securities, tells Capital Pioneer that the sandbox approach “is the way
to go to gain knowledge”.
Applying existing technologies
The arrival of PISCES raises the potential for technological innovation in how investors buy and sell unlisted securities.
“PISCES is about using existing technologies, but applying them in a new way,” LSEG director Tom Simmons tells Capital Pioneer. “Making use of the infrastructure that sits behind public markets in private markets is what differentiates the intention of PISCES from the private markets that exist.”
In a Barclays 2024 report on private markets, BlackRock president Rob Kapito listed illiquidity, complexity, transparency and access among the challenges that investors face when approaching private markets.
“The performance of private market investments can vary widely, and they don’t come with the same disclosures or real-time trading prices that publicly traded securities do,” he said. “However, with product innovation, advances in technology, and developments in the policy space, some of these issues are being solved.”
PISCES platforms will operate intermittent trading windows – ranging from being monthly, quarterly or biannually – and, participating PISCES companies would choose the frequency of potential auction windows and their duration.
“We would expect this to prompt new software development to manage intermittent participation,” says Blake Morgan’s Kay, predicting the use of artificial intelligence tools to identify market trends and guide regulatory responses, as well as the use of smart contracts to automatically adjust trading terms.
Tokenising private assets
Technological advances and a potential shift to methods like tokenisation could theoretically open new opportunities in private markets.
In February 2024, investment bank Citi announced that it had conducted a proof of concept on the tokenisation of private funds with asset manager Wellington Management and exchange-traded product provider WisdomTree.
The project identified efficiencies brought using smart contracts that are currently unavailable with conventional assets. The contracts could allow buy and sell-side institutions to engage with DLT while adhering to regulations, Citi said.
“Smart contracts and blockchain technology can enable enhanced rule-enforcement at an infrastructure level, allowing data and workflows to travel with the asset,” Citi Digital Assets emerging solutions lead Nisha Surendran said at the time.
According to a report by investment bank Houlihan Lokey, “Markets for private assets may be best positioned for the benefits of evolution toward a completely digital ecosystem and framework since they are currently more inefficient and opaque than public markets.”
“DLT will be the next step in market evolution, continuing from paper to analogue and then from analog to electronic phases,” it continues.
“Private markets (debt, equity, real estate) still have not completed the electronification to the extent that public and OTC traded markets have, with a framework that supports derivatives, securitisation, and exchange-traded structured products.”
A red herring?
The PISCES platform may not yet be suitable for tokenisation, however. “PISCES wasn’t set up for digital assets, it was set up for private assets,” says Benjamin Santos-Stephens, CEO of digital assets clearing house ClearToken. “But one of the logical ways of dealing with private assets might be to tokenise them, because they’ll be easier to move around.”
It may require advances in regulation and technology to open PISCES up to the potential benefits offered by tokenisation – and some are already knocking on the door.
“There has been a call for greater adoption of tokenisation in capital markets as more participants see the benefits it offers in terms of efficiency and access to markets,” says Blake Morgan’s Kay.
“While there has been an increase in fintech firms pushing forward pilot programmes however, barriers will continue to remain such as, regulatory uncertainty, lack of standardisation and concerns over security,”
he continues.
“It is difficult to see how this could currently be applied in the context of private companies using PISCES for intermittent trading of their equity securities,” Kay says. “This may be something for the future with a more regulatory framework and further technological advances.”
A tokenised future?
The FCA has worked with the fund industry to explore the uses of tokenisation, recognising that it could make products more efficient, transparent and accessible to consumers.
According to the regulator, some asset managers have expressed an interest in using blockchains to automate administrative work and facilitate interactions between institutional counterparties.
The FCA, as well as the Treasury, are observers on an industry-led working group that is weighing up the implementation of fund tokenisation in the UK. The FCA contributed to a report published by the working group in March 2024.
“Within the UK, we have confirmed that there are no significant legal or regulatory barriers to the industry blueprint for tokenisation – unlocking the opportunity to implement DLT in fund processes,” the FCA’s markets and international executive director Sarah Pritchard wrote in the report.
“We stand ready to consider any applications under the existing regulatory regime, or test new use case propositions through our sandbox.” The FCA’s website does, however, note that “commercial, legal, and technological challenges may inhibit” the widespread use of fund tokenisation.
An international model
The FCA is also participating in ‘Project Guardian’, an initiative led by the Monetary Authority of Singapore, which is exploring asset and fund tokenisation and decentralised finance. The Financial Services Agency of
Japan and the Swiss Financial Markets Supervisory Authority are also involved in the initiative.
Project Guardian published its first report in November 2024, in which it acknowledged the potential of tokenisation for private markets. “By creating a marketplace for fund tokens, secondary markets could reduce price opacity and reduce information asymmetry, where timely, good quality disclosures are made to the market, especially for private asset investments,” it said.
The report touted fractional ownership, greater liquidity and improved price discovery among potential benefits of fund tokenisation. It noted a number of challenges to adoption, however, including custodial and security risks, the need for investor education on tokenisation, and a lack of regulatory certainty.
In the view of ClearToken’s Santos-Stephens, capital markets would benefit from securities like private loans, bonds and shares, which are not in central securities depositories, being held in a digital format that allowed them to be moved around more easily.
“These things are PDFs today,” he says. “It’s not very useful having a PDF in terms of being able to prove you own the asset and borrow against it, or transfer the ownership.”
“The big challenge of tokenisation is to enlarge markets and to move up to a more international, regulatory model,” says TISE’s Vermaas.
