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long read

The public market puzzle solution

Author: David Prosser

Published: 09 Nov 2023

cube tech micro chip purple light glow ICAEW Corporate Financier IPOs

As a leading centre for investment capital, London needs a healthy IPO market. David Prosser looks at the challenges it faces in an increasingly competitive market for capital and businesses considering a listing.

For champions of British companies, the flotation of the country’s flagship technology business Arm in September was a bittersweet moment. On the one hand, the £56bn initial public offering (IPO) was a record for a British company. On the other, Arm’s decision to list in New York rather than London, despite repeated overtures to at least consider a dual listing, disappointed many. For critics of London’s financial markets and the UK’s regulatory regime, Arm’s move was symptomatic of a bigger problem.

Arm, of course, is just one business. But the latest data on listings does appear to show London is losing ground when it comes to IPOs. It is an exceptionally challenging environment for new issues. Amid the risk aversion of investors, the increasing cost of capital and the ongoing market volatility, London does seem to be finding the going particularly tough. 

To set this in a global context, IPO activity is currently in the doldrums around the world. Globally, 1,018 IPOs raised $147.9bn (£122bn) during the first nine months of 2023 according to the latest data from EY, which is 5% down in volume and 32% down in value on the same period of 2022.

Still, the UK appears to be suffering disproportionately. In the first three quarters of the year, 23 companies listed in London, 32% less than for the same period of 2022. Those businesses raised £953m, 18% down on the previous year – and more than half of that money came from a single deal, the flotation of Admiral Acquisitions. 

Direction of travel

While IPO activity is inevitably cyclical, the long-term trend appears set. Government-commissioned research suggests there has been a 40% decline in IPOs in the UK since 2008.

“Almost everywhere has experienced difficulties, but there are definitely some UK-specific issues,” says Grant Humphrey, UK IPO leader at EY. “Inflation in the UK looks set to stay higher for longer – and the political upheaval we’ve seen hasn’t helped either.”

Indeed, other markets appear to be seeing chinks of light at the end of the tunnel. A recovery in North America in recent months, for example, has seen IPO activity in the US edge ahead of last year’s totals, according to EY. Continental Europe also appears to be seeing more deals, but there’s no sign of a similar uptick in the UK.

“This year has been dire for IPOs,” says Rick Thompson, managing director of investment banking at Singer Capital Markets. “We’ve seen a really marked decline in activity since 2021, when the IPO market in London was buoyant.”

The question is whether London’s slump in IPO activity is just a cyclical blip, or something more fundamental – a reflection of problems that are prompting businesses to look elsewhere.

One issue, certainly, appears to be diminishing demand for UK equities – whether new listings or on the secondary market. Domestic investors are turning their back on British companies. At the small and mid-cap level, UK funds have reported net outflows of money in almost every month for more than two years. Across the whole market, Pension Protection Fund data reveals that UK final salary pension schemes now hold just 19% of assets in equities, down from 61% in 2006.

This has left the UK reliant on overseas investors, whose asset allocation decisions are entirely hard-headed. The average stock in the FTSE 350 currently trades at around 13 times future earnings, against 18.5 times for the S&P 500.

“We’ve moved into a surreal world where the cost of compliance for a London-listed company is just extraordinary,” says Jon Moulton, private equity veteran and chairman of Better Capital. “The UK needs to decide whether it wants its stock exchange to be entrepreneurial and dynamic, or whether it is the place to force companies to engage with societal issues.”

His point is that even when there is demand for UK equities, companies are baulking at the compliance burden a London listing entails – both during the IPO process itself and on an ongoing basis thereafter. “At the larger end, regulation has become a really big issue – the average FTSE 100 company’s annual report now runs to 93,000 words,” Moulton says. 

“We’ve seen around 400 additional disclosure requirements added in recent years, particularly around environmental and sustainability performance.”

Other markets, including the US – which was once considered far more bureaucratic – have not followed suit, providing them with a potential competitive advantage. “London has many advantages: language, time zone and the stability of our legal system and governance are all important,” says Singer’s Thompson. “But we can’t afford to rest on our laurels – there is global competition for IPOs and that does mean being prepared to make changes to compete.”

New era, new rules

The authorities in the UK have recognised this. Not least, the government has moved forward with most of the reforms proposed in Lord Hill’s UK Listing Review, published in 2021 (see box below). The Financial Conduct Authority is in the middle of an extensive consultation exercise on implementing greater flexibility and reduced bureaucracy, points out Giles Distin, corporate finance partner at Addleshaw Goddard. 

“We need a regime that is prudent but pragmatic,” he argues. “But it’s also about the regulatory mindset – the extent to which we want to manage all risk out of public markets, rather than accept that the nature of equity investment is that there will sometimes be failures.”

The London Stock Exchange also recognises it has a role to play. In the policy arena, Julia Hoggett, the LSE’s chief executive, chairs the Capital Markets Industry Taskforce. Its remit is to “maximise the impact of capital market reforms” – broadly to make it easier for companies of all sizes to secure funding.

UK listings regulation

The Financial Conduct Authority has proposed a slew of reforms aimed at making the UK’s listing regime “more effective, easier to understand and more competitive”.

At the centre of these reforms, the regulator has suggested replacing the standard and premium listing segments on the UK stock market with a single category of shares featuring lower eligibility requirements for companies planning an IPO. Early-stage companies had previously struggled to meet some of the financial tests, the FCA argues.

The changes would build on work already underway to streamline the listing regime, including lowering the free float levels that require a minimum proportion of the company’s shares to be public, liberalising the rules on dual-class share structures and introducing digital financial reporting. A new set of admission-to-trading rules will also reduce the amount of disclosures companies have to make as part of their IPO. 

“There will hopefully be a shift to a more flexible and less prescriptive regime,” says Addleshaw Goddard’s Giles Distin, who recently joined the Corporate Finance Faculty board. “One that recognises some of the existing rules and document requirements are no longer appropriate or helpful for listed companies and their investors.”

There has been a series of reforms over the past few years, aimed at lightening the UK listings regime and attracting more companies to the UK stock markets. Back in 2013, the LSE launched the high growth segment, which made it easier for fast-growing companies to list on the main market. A few years ago, there were reforms to make the market more permissive for dual-class shares and attractive to SPACs (albeit after that bubble had burst).

The key, argues EY’s Grant Humphrey, is not to undermine investor protection, which is widely regarded as a strength of the UK system. “We’re in a good place in that there is now a large group of people aligned with making the UK a better place to list a business, but we just need to strike a balance,” he says.


At a more commercial level, Hoggett argues that the LSE is already working hard to make itself a more attractive place to list. “I do think there is value in reminding some of those who comment on the London Stock Exchange that we remain the leading capital-raising venue in Europe by any measure, and one of the leading venues in the world,” she says. “But no one ever improves by assuming they are already the best they can be.”

Hoggett points to initiatives such as the planned launch of the LSE’s intermittent trading venue (see box below), which will enable privately owned companies to offer their shares for sale in periodic auctions, as an example of how the LSE is not resting on any assumed laurels. But she is also determined to push back against any suggestions that the Arm IPO in New York is an indication that London has had its day.

The LSE initiative

One cause of the UK’s slowing IPO volumes has been that businesses are staying private for longer – not least because they have been able to access plentiful private equity funding. Research group Beauhurst estimates that the UK is home to almost 20,000 privately owned businesses that have raised equity finance.

Now the London Stock Exchange hopes to attract some of those companies with the launch next year of an “intermittent trading venue”. The idea is that private company investors – both founders offering new stock and existing shareholders – would be able to sell their stock on an organised market through periodic auctions. The venue would open perhaps 12 times a year, enabling trading in shares in private companies that don’t want to move to a fully fledged listing. 

Outside the auction windows, companies would continue to operate as private businesses, free from the compliance and disclosure obligations of their listed counterparts.

Similar initiatives in other markets have already proved successful. The Nasdaq Private Market has been up and running for a decade, and Deutsche Börse has plans to launch an equivalent market in Europe. However, the jury is out on whether the new venue will capture investors’ imagination in the UK. At Singer, Rick Thompson says: “It will be interesting to see if the intended limited ongoing disclosure will deter investor engagement.” 

By contrast, Jon Moulton of Better Capital says: “These venues can provide a genuine alternative to the traditional listed market.” He points to the success of the Guernsey-headquartered TISE, which launched a similar venue earlier this year.

On the mainland, the legislation enabling the LSE to launch its intermittent trading venue also provides an opportunity for rival market providers to launch alternative venues. The exchange itself has said it is expecting to see competition, which could further boost listings.

“[There is] this idea that UK companies now need to go to the US if they want a successful listing, but of the 23 UK companies raising more than $100m that have gone to the US over the past 10 years, six have already delisted, 13 are trading down and only four are trading up,” she says, adding that the “huge liquidity differential between the UK and the US” is something of a myth. “When properly adjusting the analysis to take account of the structural differences between markets, London and US market liquidity volumes are actually very similar.”

Previous LSE innovations have delivered good results. The Alternative Investment Market, for example, which celebrates its 30th birthday next year, certainly encouraged many smaller companies to pursue IPOs with its more relaxed regulatory regime. “London can continue to make itself relevant by maintaining its focus on junior companies,” says Distin. “AIM has been a real success story.”

Investor confidence

The reviews of the work done so far by both the LSE and policymakers are pretty mixed. Some are sceptical about its fundamental significance alone. “The certainty and stabilisation of the broader macroeconomic backdrop is what will drive the IPO market recovery,” argues Kat Kravtsov, director in PwC’s UK capital markets team. “While reforms that will make it easier to list in the UK are definitely helpful because the market ecosystem does need to evolve, reforms alone will not create investor appetite for IPOs.”

Kravtsov points to sticky inflation in the UK as one driver of caution for investors in potential UK IPOs, along with political risk. “Confidence that interest rates have peaked and inflation is declining will support increasing investor confidence. However, investors have also tended to be more cautious in election years.” 

The fact that so many IPOs launched in the record year of 2021 then subsequently underperformed hasn’t helped investor confidence either, she adds. High-profile ‘flops’ have included Deliveroo, Wise and The Hut Group.

Still, PwC does now anticipate an uptick in IPO activity in the UK, albeit not until well into next year. “We’re definitely beginning to see more companies preparing the ground, even if they’re choosing to float a little later with a stronger story about profitability,” she says. “We’ll probably see some opportunistic new issues this year, but we think it will be spring 2024 before we see a broader return to UK IPOs.”

Other markets may bounce back more quickly, but that should at least provide comfort that the broader conditions are once again becoming more supportive. In this sense, the success of the Arm IPO – and the company’s strong subsequent share price performance – can be seen as encouraging.

“The broader IPO market is reopening for the right companies and there is a degree of excitement around IPOs again,” says Kravtsov. “Investors are looking for that balance between growth, profitability and potentially dividend income.” 

The challenge for the UK will be to persuade companies that London is able to offer this balance.

List or secondary sale?

One wrinkle in the fundraising data is that London continues to outperform when it comes to secondary issues. Businesses listed on the London Stock Exchange raised €11.7bn of new funding during the first half of the year according to PwC, more than any other market in Europe. 

One question is whether risk-averse investors are now more comfortable investing in the known quantity of a listed business via a secondary offering than in an untested IPO. However, PwC’s Kat Kravtsov suggests a different take. “Demand for secondary offerings indicates that capital is available,” she argues. “It’s a good precursor to the recovery of the IPO market.”

Either way, policymakers remain committed to making it easier for businesses to raise additional capital in London. The UK Secondary Capital Raising Review, led by Freshfields partner Mark Austin for the Financial Conduct Authority, which ran alongside Lord Hill’s review of the listing rules, suggested that companies should be able to raise up to 20% of their share capital in new issues, an increase from the current 10%. This change was made temporarily during the COVID-19 pandemic, as companies looked to raise capital buffers, but is now likely to be made permanent.

A more controversial question is whether the UK should copy the example of the US, where existing shareholders – such as retail investors – do not all have to be given access to secondary issues. The Austin review recommended retaining the current system of pre-emption rights.

International competition

IPO activity worldwide this year has so far been dominated by China, where streamlined listing regimes in Shanghai and Shenzhen have encouraged activity on mainland stock exchanges. Of the $63bn of IPO activity recorded by PwC worldwide during the first half of 2023, China accounted for almost half – $30.8bn of listings in all. The next busiest market for IPOs, the US, saw just $10.9bn of listings, although it was the only country that attracted more companies from other jurisdictions than in 2022, underlining its draw for overseas issuers, including British businesses.

While China’s IPO market has since slowed, the data reveals just how competitive the global battle for listings has become, with emerging markets increasingly accounting for a larger share. IPO totals reached $3.9bn in the United Arab Emirates in the first half of the year, with a privatisation programme making a significant contribution. But Indonesia, India and Turkey also recorded significant sums. In Europe, activity was more subdued, with deal volumes down 27% year on year in the first half. Istanbul was a rare bright spot, with more than 20 IPOs that raised €1.2bn, and Euronext’s Borsa Italiana raising €1.2bn from nine listings.

That said, IPO activity on the continent did accelerate during the third quarter of 2023, with further IPO announcements now expected before the end of the year. One high-profile example could be CVC Capital Partners – the private equity group is widely rumoured to be planning a listing in Amsterdam in November, which would be another disappointment to the London Stock Exchange.

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