In an open letter to the UK chancellor earlier this year, Jonathan Hill – chair of a review into why London’s stock markets were losing their appeal to companies seeking to float – laid out some stark facts.
London accounted for just 5% of IPOs around the world between 2015 to 2020 (it was 25% in 2005). The number of listed companies in the UK has fallen by 40% since 2008. At one point in summer 2020, NASDAQ-listed Apple (AAPL) was worth more than every company in the FTSE 100 combined.
Hill went on: there were “increased flows” of business to Amsterdam, highlighting stiff competition over in Europe; let alone from the real heavy-hitters of the US and China.
As for London-listed companies themselves? The biggest among them are “more representative of the ‘old economy’ than the companies of the future,” he said. London investors have gained a reputation for being less tech-savvy and tech-friendly than in New York.
Beyond the criticisms contained in the March review, there is sense among commentators that the London Stock Exchange ain’t what it used to be – a hub of international innovation, the place to go to raise capital, with membership of a globally-coveted status symbol – which it was considered as recently as the 2000s.
Analysts have blamed various factors, such as the prominence of income funds, which Paul Marshall of investment manager Marshall Wace argues penalise growth by prioritising dividends.
A recent Economist briefing described a “vicious cycle”: if London’s equity market puts a low value on firms, they may choose to list in places where they can sell shares for more cash; but a lack of “exciting” flotations has lead to continued low valuations; and the best performers whose share prices are dragged down by association are “picked off by private buyers”.
Then there are regulations that have been accused of hampering dynamism in the market. Even director of market oversight at the Financial Conduct Authority (FCA), Clare Cole, recently said the current UK listing regime was “stuck in 1984,” had failed to adapt to modern requirements, and was scaring many companies off.
And so, from 3 December, the UK will see three changes to its listing rules, led by the FCA.
The first will allow firms that list on London’s Premium Main Market to have a form of dual-class share structure, normally meaning public shareholders get limited or no voting rights. While sometimes criticised for top-loading risk and decision making, the move is a bid to entice those coveted innovative founders who wish to keep more control over their company, with the structure generally permitted on the Nasdaq and New York Stock Exchange.
It may pay off – dual-class firms made up just 15% of US IPOs in 2020, but 60% of IPOs’ overall market capitalisation that year.
Recent London floats by fintech Wise (WISE), delivery firm Deliveroo (ROO) and e-commerce business THG, in which all listed directly onto the standard segment of the market in order to keep a dual share structure despite it keeping them out of the FTSE indices, reinforce the case for demand – though perhaps also highlight the issues ahead. All have seen their share prices sink since listing, and THG’s chief executive recently saying listing in London had “sucked from start to finish” and he should have picked New York.
The second change will reduce the number of shares that must be free floating from 25% to 10%. This applies at the point of listing and beyond. The FCA said this would “reduce potential barriers” for issuers and encourage firms to list earlier.
Finally, there will be a significant hike in the minimum market capitalisation threshold on London’s premium and standard listing segments from £70,000 to £30 million. The FCA’s reasoning is to “give investors greater trust and clarity about the types of company with shares admitted to different markets”. It has previously said companies under this limit would be “better suited” to London’s junior AIM market.
While the former move is relatively uncontroversial, the latter has come in for criticism. Two executives recently wrote to the FCA to warn it could “undermine” London’s competitiveness by excluding ‘cash shell’ companies whose assets consist wholly or predominantly of cash and usually exist to acquire other businesses.
Dan Lane, senior analyst at investment app Freetrade, asked: “Is the assumption really that firms worth over £30m are suddenly squeaky clean?”
“If that’s missing the point, both investors and firms on the cusp of a listing might want a bit more clarity on the thinking here.”
Chris Cummings, chief executive of trade group the Investment Association, said the reforms were “welcome” and would help “achieve the right listing environment which attracts high-quality and innovative companies to list and operate in the UK.”
But he said the quality of companies that list in London was more important than the number that do, and the UK must now “focus on a broader set of reforms to the wider listing ecosystem, including promoting the UK as a listing venue and improving the advice and support that high growth companies receive through their listing journey.”
Russ Mould, investment director at AJ Bell, agreed that “a flow of new deals is not the only measure of success,” and told capital.com there “could be a downside” to a flood of IPOs, too.
“As the new listings booms of 2005-07, 1998-2000 and the early 1970s will attest, a string of successful floats can tempt investors to let down their guard and permit lower-quality companies to come to market, as both buyers and sellers think there is a quick buck to be made.
“Dual-class share structures and a lower free float may tempt more entrepreneurs to London but it may tempt more charlatans as well, and in the process raise the risk of poor governance costing investors their hard-earned savings.
Freetrade’s Dan Lane was more optimistic: “Companies are staying private for longer and coming to the market once a lot of their value has already been created,” Lane said.
“If these new rules do entice firms to come to market earlier that would give retail investors the chance to own a part of these long-term opportunities when they actually want to, rather than just when they can.”
Nick Graves, head of corporate at law firm Burges Salmon, noted that while the rule changes “should help the London market attract and retain high quality growth companies,” many would still stay private for some time given the ready availability of private capital.
A panacea for the London Stock Exchange’s ailments these reforms would not seem to be.
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