Cavendish Tech Chat | We love regulation

For anyone who’s ever had to deal with older property leases, you’ll be familiar with quarter days, which were the traditional rent due dates: Lady Day, Midsummer’s Day, Michaelmas Day, and Christmas Day. Lady Day, March 25th, was the first day of the new year: hence 31st December 1700 was followed by 1st January 1700; whereas 24th March 1700 was followed by 25th March 1701.  

In 1752 the UK decided to fall in line with the Gregorian calendar, which mainland Europe had done in 1582, and which had since caused much confusion. This meant that we had to lose 11 days, and so the switch was made: 2nd September 1752 was followed by 14th September 1752 – and the same Act of Parliament moved the “new year” to 1st January. 

You and I are still feeling the repercussions of this: to ensure the commercial tax year still had 365 days, the tax year end moved forward, from 24th March to – to 5th April, which is why we are still lumbered with such a peculiar date for our tax returns.  

So, happy new year and here is our second “looking to the year ahead”  (here’s our January top picks note). The result of the current pace of government (in)action in supporting UK Equity Capital Markets is that instead of stock picking, everything, is cheap: bargains are to be had, as witnessed by the 51 public to private transactions from the constituents of our 2 tech indices in the last five years as per our Joy of Techs report (see here).

When stock picking means “all of them,” then we once again recommend you revert to our tech team investment maxims:  

1. The three certainties in life are death, taxes, and regulation. Invest in companies that make monitoring of, and compliance with, regulation, effortless. 
2. Automation of the unglamorous will always be in high demand.  Efficiently undertaking other companies' non-core functions is route to very long-term recurring revenue.  

UK markets could rally in a trice through enforcing pension and insurance investment in the UK domestic markets, by reform to balance the regulation-driven risk-averse obligations of Trustees. The obsession with bonds has created the current vicious cycle where equity investment outflow lowers valuations and drives down returns - and causes further outflow. Returns are then so poor that when any equity investment is subsequently considered, it won’t be invested in the UK, based on the near history of returns. 

As our CEO Julian Morse pointed out, UK pensions and insurance funds have only 3% exposure to domestic equity, down from 45.7% in 1997, according to ONS data. Natalie Bell at Liontrust highlights how this compares to other countries: France 26%. Australia 38%. Italy 41%. A 1% movement would increase UK inward investment by £10bn.  If the Mansion House Reforms encourage that investment towards unlisted securities with transparent pricing, then while some further clarification is needed, that still sounds very much like AIM. Maybe it will be a happy new year, under Labour.  

Much as regulation is usually dry and tedious, the Calendar (New Style) Act of 1750 showed the power of regulation in driving change – while the current malaise in UK small cap is a demonstration of the absence of appropriate regulation, with unpleasant national consequences for investment, innovation, and employment. Delivering the double header of (inherently!) unglamorous regulatory software represents the big time: we are proud to have held Ideagen’s hand as it grew from £0.3m to £1.1bn delivering compliance software. There are regulation-driven diamonds in the rough on AIM still waiting to be polished, and matching our maxims: whether in cybersecurity, workflow software, railway operations, capital markets risk monitoring, website bot and fraud monitoring, digital credentials management, and more, all waiting to deliver the rule of 40 and beyond. 

Happy Friday and enjoy the fact that tomorrow is the first of 300 days of putting off doing your tax return.