The United Kingdom is home to one of the largest capital markets in the world and provides liquidity to a range of national and multinational companies. It continues to serve as a hub for export services as well as technology and business process innovation, with a flourishing private capital market.
Yet negative narratives about the dynamics of UK capital markets persist, with a consensus that UK companies are undervalued compared with other markets, that private capital is degrading the landscape for listed companies, that the rise of passive investment inhibits UK-listed companies, and that the UK may be missing out on top talent because of unfavorable CEO pay. To address some of these perspectives, we conducted a review of UK capital markets and those in comparable countries, mainly France, Germany, and the United States. Our findings reveal a much more nuanced picture of UK capital markets than many global leaders may have in mind.
In this article, we offer executives a broad fact base to work from as they set their global strategies and consider the opportunities that UK capital markets present. Across all four of the domains we looked at—valuation, private capital, passive investment, and CEO compensation—a common theme emerged: To improve the vibrancy of UK capital markets, investors, issuers, and market shapers (regulators, government, and industry bodies) would be best served by renewing and recommitting to a focus on growth, reinvestment, and long-term outcomes.
Differences in valuation between UK and US companies are mainly driven by growth and ROIC
The apparent valuation gap between UK and US companies stems from differences in growth and ROIC in the two geographies. Closing this gap will require stronger UK corporate performance and greater focus on long-term growth versus dividends.
Many business leaders believe there is a valuation gap between the United States and the United Kingdom, and that UK companies are significantly undervalued. At face value, that may appear to be the case: The United Kingdom’s average EV/EBITDA1 multiple (7.7) appears to lag behind that of other countries (9.8 in the European Union, for example, and 13.8 in the United States).
Our analysis shows, however, that the difference in corporate valuations between the United Kingdom and the United States could largely be attributed to historical EBIT growth rates that, in turn, are influencing future growth expectations. In the United Kingdom, that growth rate is about 7 percent—compared with about 10 percent in the European Union and about 13 percent in the United States (Exhibit 1). Moreover, higher EBIT growth rate expectations in the United States are being bolstered by the top 50 large-cap companies, while the weaker capital efficiency of companies in the United Kingdom—3 percent in the United Kingdom versus 7 percent in the United States—is weighing on their valuations.
While there is a similar valuation spread across sectors in the United Kingdom and the United States, a preponderance of highly valued outlier companies in US indices has had an uplifting effect on US valuations. These “champion stocks” tend to pull up overall index performance. By contrast, the relative underperformance of the largest UK companies, as well as the absence of significant outliers, has tended to have a detrimental effect on valuations.
We used McKinsey’s Technology Trends Outlook 2024 report to further explore this dynamic: We categorized the top 100 companies in the US S&P index according to the five trends outlined in the report, and we did the same with the top 100 private and public companies in the United Kingdom. We saw four times as many technology companies in the US S&P index compared with the number of technology companies among the top 100 businesses in the United Kingdom. The industry mix, which in the United States is weighted more toward sectors such as technology, semiconductors, and pharmaceuticals, underpins the higher sector multiples we see in our analysis, even when outlier companies are excluded (Exhibit 2).
These data suggest that corporate leaders are most likely to affect valuations by bringing growth expectations in line with international peers and focusing more on long-term value creation.
Private capital appears to have spurred stronger growth and investment than UK public markets
Private capital is driving a significant share of UK delistings, and there is evidence of stronger revenue growth in these companies after the change in ownership compared with their time in public markets. The jury is still out on the eventual returns these transactions will generate, but corporate leaders could still take lessons on enhancing performance from the private capital playbook.
There are some voices that suggest private equity (PE) players are degrading UK public markets as they increasingly take listed companies private. Between 2006 and 2021, there was a 44 percent reduction in the number of publicly listed companies in the United Kingdom; reduction rates were similar in France and Germany. By contrast, the United States saw only a 6 percent drop in the number of publicly listed companies during the same period.
Our research shows that in the United Kingdom, more private capital is deployed to delist companies than in other countries. In fact, take-privates account for 18 percent of PE activity in the United Kingdom, compared with 1 percent (on average) in the United States, 2 percent in France, and 12 percent in Germany.
Our analysis shows that, in the largest deals over the past five years, PE take-privates were executed at about a 40 percent valuation premium, indicating conviction that significant latent value could be unlocked in these companies. Because they often aren’t held to the same investor expectations for dividends, and because there is less emphasis on quarterly reporting cycles, privately owned companies were better positioned to reinvest their capital to deliver higher growth. By contrast, public companies in the United Kingdom typically pay more dividends than US companies, with around 70 percent of UK-listed returns coming from dividends compared with less than 40 percent in the United States.4
At the same time, PE firms have played a leading role in repopulating UK indices: 65 percent of UK-originated IPOs in the past ten years were for companies that had been fully or partially owned by PE firms—compared with 32 percent in the United States. In fact, the London Stock Exchange had the leading position in number of such IPOs between 2018 and 2022 compared with peers, although momentum has slowed more recently (Exhibit 4).
The growing momentum of private capital in the UK, and the increasing interaction and intertwining with public markets, presents an opportunity for corporate leaders. The UK’s deep and strong private capital base can propel start-ups toward IPOs and can give more established companies the space to undergo a renewal cycle via delisting and relisting, while also providing an additional source of capital for corporate leaders to pursue growth. Indeed, the UK is well-suited to global companies that want to be exposed to the intersection of public and private capital. Stakeholders would do well to better understand this global trend and explore where it can be additive to their strategies.
The rise of passive investors may have a more pronounced role in the UK because of a binding corporate governance code
Passive investors are on the rise throughout the world. However, the United Kingdom’s binding corporate governance code adds a unique layer of governance pressure that may be amplifying the influence of passive investors.
Passive funds, which are on the rise globally, have become more popular because many believe they deliver returns that are on par with those produced by active managers, for a lower fee. Many business leaders have expressed concerns that these passive funds typically engage less with their boards and management teams on strategy and direction than they would want.
According to our research, passive ownership is neither more pronounced nor growing faster in the United Kingdom than in the United States. The proportion of large-cap passive assets under management (AUM) in the United States was 73 percent in 2023, up from 52 percent in 2014. Passive AUM in the United Kingdom was 67 percent in 2023, up from 48 percent in 2014 (Exhibit 5).
However, it may be more challenging for leaders to engage effectively with passive funds, given the more fragmented ownership of UK-listed companies and broader corporate governance norms in the United Kingdom. Our research shows that the underlying ownership of UK-listed companies is more fragmented than in European and US peer markets—with about 55 percent of companies in “widely held” ownership (in which no shareholder holds more than 10 percent of voting rights) (Exhibit 6).
Furthermore, UK regulations and governance codes, including binding “say on pay” requirements, mean that shareholder resolutions carry much more weight, exacerbated by passive funds that often end up limiting their engagement with management to somewhat formulaic voting. Because of this, and the previously cited fragmented ownership, business leaders in the United Kingdom can find themselves in a situation where there is a binding vote against them that they must follow but no sufficiently engaged “owner” they can interact with to influence the vote. In other words, under a governance regime that allows for “comply or explain,” there may not be an owner with sufficient sway to “explain” to. In this environment, passive investors may have to redefine what it means to be truly passive. Updated approaches to investor relations, corporate governance, and investor education are likely required to deliver greater value for all stakeholders.
By reflecting the growing influence of passive funds in its corporate governance standards, the United Kingdom has an opportunity to lead the way in enhancing the efficacy of its capital markets. Specifically, corporate leaders in the United Kingdom should actively look for ways to improve their engagement with passive investors.
Substantial differences in equity awards drive the disparity in CEO compensation between the United Kingdom and the United States
The base pay of CEOs in the United Kingdom and the United States is broadly similar; the real driver of compensation differences is significantly higher equity awards in the United States.
The prevailing wisdom among leaders is that executive compensation in the United Kingdom is materially lower, in absolute terms, than that in the United States—although it is on par with pay scales in Europe. That perception has been cited as a source of significant challenges for companies looking to attract, retain, and reward top global leadership talent using appropriate financial and nonfinancial incentives.
Our research shows there is actually less difference in base executive pay for CEOs across regions. According to our analysis, the median fixed compensation for CEOs in the United Kingdom (looking at 97 CEOs in the FTSE100) is $1.0 million, compared with $1.5 million in the United States (looking at 99 CEOs in the S&P 500) and $1.6 million in Germany (looking at 32 CEOs in the DAX40). The biggest difference is in the equity upside, with a median equity-enhanced CEO salary of $1.2 million in the United Kingdom, compared with $14.5 million in the United States. Our research also pointed to a positive relationship between compensation growth and growth in excess total shareholder returns (TSR) over time (Exhibit 7).
However there is more to the story. When normalized for market cap, the United Kingdom displays the highest median CEO compensation compared with the United States or Germany (Exhibit 8). This would suggest that a likely path to comparable US compensation levels for UK CEOs is through larger equity awards that are triggered by delivering growth in the overall value of the company.
In addition, there is an important difference between talent markets in the United States and the United Kingdom when it comes to CEO pay, which is the presence of a binding investor vote on pay policy in the United Kingdom versus a nonbinding investor vote in the United States. Under these conditions, UK companies may face a dual-edged challenge: Lower growth likely limits the upside of executive compensation, and the effect of binding votes may reduce companies’ flexibility in structuring pay awards. These realities may hinder companies’ ability to attract top talent or motivate stellar performance within and among senior management teams.
UK public companies should take a more nuanced look at executive compensation norms and the impact of governance codes so they can better incentivize CEOs to focus on growth and align with global peers. In doing so, they will ensure that they can use compensation to attract the best global talent.
There are many factors influencing UK capital markets, with a range of economic, structural, and country-specific idiosyncrasies that help to account for differences with other global markets. But, as our research suggests, it’s critical for corporate leaders to look beyond the simple view, take a more balanced perspective, and recognize the opportunities that exist within UK public markets.
UK capital markets provide a distinct “offer” across multiple dimensions—geopolitical strengths, market size and liquidity, more IPOs than European peers, and opportunities presented through the interaction of public and private capital. Stakeholders need to more consistently embrace long-term strategies, create growth, and innovate to close gaps with global peers. Our research points to a clear playbook for doing just that—what we’ve previously called “systematic ambition.” These include engaging investors and providing incentives for executives to explore long-term strategies, exploring new markets and business models, partnering with innovators to further capabilities in technology, and purposefully reskilling the workforce.
Taking these steps can help UK capital markets close the gap with other countries—thereby countering the current negative views and positioning them for outsize success.
