I wish Sir Nigel Wilson, the former Head of Legal & General, and Penny James, the ex-Direct Line CEO, together with the other City bigwigs that have been appointed by the Capital Markets Industry Taskforce, the very best of luck! Their mission, to devise a plan to reinvigorate the attractiveness of the London market, is a difficult challenge.
Proposals published only a few weeks ago by the Financial Conduct Authority (“FCA”) for reform of the UK equity listing regime, with the aim of shaking-up the market and making it more competitive, failed to impress. I have yet to meet anyone in the City that thinks the proposed changes to the listings rules are a good idea, which is telling because you would think they would welcome less regulation.
Companies and their professional advisers are not against reform, far from it! They would welcome changes aimed at increasing proportionality in the scope and application of regulations, the streamlining of documentation and a reduction in bureaucracy (born-out by a PKF survey the results of which were published here in 2021). But their experience is that, unfortunately, recent proposals by regulators rarely hit the intended target.
It has been almost two years since the FCA’s Primary Markets Effectiveness Review in July 2021, and the London market continues to lose ground to other markets, and the US market in particular. The first half of 2023 has been especially depressing with almost weekly announcements that large companies are transferring away from London, or thinking about it, while others trumpet their intention to IPO elsewhere. This litany of negative news has panicked the politicians into demanding remedial action, but what has gone wrong and can anything realistically be done to reverse this trend?
The key issues facing the London market are the dramatic fall in the number of companies listing in London – down 40 per cent since 2008, and the reduction in the percentage of London shares owned by pension funds and insurance companies – currently only four per cent compared to 52 per cent in 1990. There are good reasons to explain both.
The higher valuations for new IPOs that attract many UK companies to list in the US has been largely driven by SPACs over the last two-three years. By its very nature, a SPAC is compelled to use the funds it raised or lose them. Rather than stand-back to reflect on the nature of a deal, there has been a scramble to find operating businesses to acquire. Recently, the shine has come off these vehicles in response to current US economic conditions and increasing scrutiny from US regulators.
Other UK companies attracted to the US market by initial valuations in excess of that which they would have achieved in London have seen their share prices drop from dollars to cents. Many have ended up in the same place they would have been had they listed in London, prompting the question: is the game worth the candle?
The big driver was quantative easing, particularly prevalent in the US giving investors huge amounts of cheap money which was funnelled into asset classes such as, stocks and shares. The taps are now off and money is flowing the other way. Bonds prices are increasing, resulting in the second-tier banking turmoil we are currently seeing in the US.
The winds are changing and may blow-in a slightly more level playing field, helped by the increase in the value of sterling which has appreciated by around 30 per cent against the dollar in the last few month and could rise further. Looked at from a venture capital perspective, US funds have been buying-up UK companies on the cheap because the market has been undervalued.
The majority of the UK companies that have gone to the States were in the technology field and it is true that the US has always had deeper pockets and is more atuned to investing in technology companies. While the proposals outlined by the FCA won’t stop technology companies going to the US, the money drying-up will.
While the FCA’s proposals are still a bit sketchy, the suggested combining of the Standard and the Premium markets doesn’t hit any of the spots that people are looking for. Investors don’t want less regulation where it is fundamental to the quality of what’s listed on the market, which would have an impact on valuations.
Pension funds and insurance companies in particular, want a Premium market. They’ve got to tick their boxes and the gold-plated standards of the Premium market gives investor confidence. Investors don’t mind having a punt on AIM or even the Standard market, but they don’t want to take risks with a FTSE 100 or 250 company. Far from encouraging them back into London market share ownership, it could very possibly discourage them.
These classes of investor follow the money. The only thing that would help pension funds and insurance companies to return to the London market is better returns – it’s the economy, stupid! It’s not the regulations that are diminishing the attractiveness of the London market, but UK economic performance because markets reflect the underlying economy and their place within the overall world economy.
What makes the London market stand-out, is what could actually save it in the long run. Regulators and the Capital Markets Industry Taskforce should be careful not to throw the baby out with the bathwater.
This article was originally published in the Q2 2023 Corporate Advisers Rankings Guide. For more information, please contact Mark Ling.