It was good to see an informed Lex note on the London equity markets discount (“The London discount is about performance, not geography”, July 25).
However, the logic explained overlooks crucial aspects of share buybacks mentioned at the end of the article. Currently, when UK-listed firms return capital to their shareholders, about 50 per cent is via dividends and 50 per cent via share buybacks. Share buybacks return capital to the selling shareholders, while the remaining shareholders benefit from an increase in ownership, proportional to the number of shares repurchased and cancelled. Unfortunately, the UK’s market rules seem designed to protect intermediaries rather than the remaining shareholders. Corporates are the largest net buyers of UK equities. The last thing a large buyer of shares should do is announce their intentions to the market before starting to buy. Additionally, updating the market daily on share purchases and handing the entire order to an investment bank’s derivatives desk further erodes value.
Consequently, a lot of this capital is lost in friction rather than being returned to loyal shareholders. One person’s friction is another person’s lunch. A closer look at investment banks’ recent earnings reveals that their equity derivatives desks are generating significant returns.
As Brooke Masters highlighted last year, poor old Royal Mail paid one such bank an 8.5 per cent fee just to buy back their own shares.
Michael Seigne
Founder, Candor Partners, Binsted Mede, Hampshire, UK
