As part of a drive to attract big tech to the City of London, UK listing regulations have been relaxed – with a number of reviews potentially delivering more changes. But some of the headline tech listings over the last 18 months have struggled to win or maintain investor backing. Garnet Roach investigates
Last year was a success for London in many ways. The London Stock Exchange (LSE) raised more equity capital than the Amsterdam and Paris exchanges combined, and the most equity capital raised outside of the US and Greater China.
The City of London also attracted many of the types of companies it has been trying to tempt for years: 39 percent of IPO capital raised came from tech and consumer internet listings. London hosted its first special purpose acquisition company, too, when Hambro Perks raised £150 mn ($204 mn) in November. The venture capital firm is now looking for a tech target.
That Hambro Perks could list a blank-check company in London was part of a raft of modernization plans taking place as London tries to shake its old school image: across the FTSE 350, there are 26 technology and consumer internet firms, while the FTSE 100 is still heavily populated by the Old Boys of the bourse.
The UK’s Financial Conduct Authority (FCA) noted in a paper published at the end of last year that although 2021 had been ‘positive’, with around 50 admissions to the Main Market between January and October, the London IPO market had been slow to recover after the financial crisis.
The number of listed companies in the UK has fallen by about 40 percent from a recent peak in 2008. Between 2015 and 2020, the UK accounted for only 5 percent of IPOs globally.
But this is a new London, looking to attract growth in a post-Brexit, post-pandemic world. And things are changing as listing rules get a shake-up, with the City now boasting names like Darktrace, Oxford Nanopore Technologies and payments firm Wise.
New rules, new listings The UK Listings Review was completed in 2020, the Kalifa Review of UK FinTech published early 2021. The FCA published its Primary Market Effectiveness Review at the end of last year, reducing free float requirements, upping the minimum market capitalization threshold and allowing dual-class share structures.
Other reviews have been happening at the same time: the UK Treasury’s consultation on its Wholesale Markets Review, a consultation on the UK Prospectus Regime and the FCA’s work on changes to the Mifid II regime as it applies in the UK.
Charlie Walker, who heads up equity and fixed-income primary markets at LSE Group, says he is seeing a very pragmatic approach to what needs to be done. ‘These reviews are essentially asking, How do we make sure London is fit for purpose?,’ he says. ‘Just because there are rules that have existed for a long time, it does not necessarily mean that they are fit for the future.
‘Take free float, for example. The 25 percent requirement was more achievable when you did not have companies growing as large in the private space as they do today. Requiring a company to sell sometimes multi-billions of pounds worth of stock, on a single day of an IPO bookbuild, is not always in its interest – or that of the wider market.’
Charlie Walker, LSE Group
A dual-class duel Then there are dual-class shares. Food delivery firm Deliveroo is certainly the most notable firm to take advantage of London’s unequal voting rights option in its now infamously poor IPO.
Many institutions publicly declared they would not be buying the company’s stock before it went public at the end of March 2021, with criticism aimed at Deliveroo’s slim profit margins and labor practices, as well as its share structure.
At the time, UK fund manager Legal & General Investment Management (LGIM) cited the enhanced voting rights enjoyed by Deliveroo founder Will Shu as a reason not to buy into the IPO. Deliveroo’s decision to give Shu preferential shares meant it had to list on the standard segment rather than the premium market when it went public, despite being slated to become one of the UK’s biggest stock market debuts for a decade, with estimates of a $12 bn valuation.
LGIM, which manages around £1.3 tn in assets, reportedly wrote to the FCA strongly recommending that companies with unequal voting structures be excluded from FTSE indexes.
‘It is important to protect minority and end-investors against potential poor management behavior that could lead to value destruction and avoidable investor loss,’ it said in a statement at the time. When approached by IR Magazine, the fund manager declined to comment further and said the firm’s stewardship team did not have ‘a huge desire to speak on this’.
For Nathan Long, senior analyst at retail investment shop Hargreaves Lansdown, part of the issue is the comfort level of UK investors that really hadn’t had to price a company like Deliveroo before. ‘Whereas in the US, they’re probably more used to price discovery around that form of corporate governance, that form of tech stock,’ he notes.
But he also points to the ‘immense pressure on asset managers to be responsible stewards’ across a range of ESG topics, including voting rights. ‘That is already happening but this pressure is only going to grow,’ Long says. ‘I can understand why institutional investors are focused on that.’
Despite the criticisms leveled at Deliveroo’s share structure, the FCA consultation on the issue found broad support to allow dual-class shares on the premium segment, and that change came in at the end of last year. Walker argues that the move isn’t as radical as it might seem.
‘Dual-class shares have always been permitted on the standard segment – that has not changed,' he says.
'But the FCA’s changes allow dual-class shares on the premium segment in a limited and proportionate way. They can only be held by directors of the company (often founders), and can only be voted to prevent an unwanted takeover or an attempt to remove the director.’ It is worth noting that the UK has been something of a takeover hotspot in the past 18 months or so.
Any premium segment enhanced shares are also time-limited. ‘It’s a stepping stone,’ adds Walker.
Nathan Long, Hargreaves Lansdown
The dividend criticism Of course, there are many factors that affect whether or not a company chooses to go public at all – and if it does, where it chooses to list. One criticism that has been much-written about is the appetite for dividends among UK pension funds.
‘In the UK, even in technology, you still get loads of income investors – whereas actually, what’s healthy for the market is to have more growth investors that in turn demand management teams drive growth,’ says Stephen Kelly, chair of Tech Nation, a UK body that provides coaching and other support to help tech start-ups grow. The argument is that if companies are weighed down by the need to pay dividends, they’ll be paying out cash to investors that could otherwise be reinvested to drive growth.
Stephen Kelly, Tech Nation
‘We need to start talking about how we get British fund managers weaned off the dividend addiction and into supporting companies with a growth strategy,’ Kelly says.
The dividend issue might not be the barrier to listing some see it as, however. On the LSE, around 35 percent of the shares that are held on the exchange are held by UK fund managers – 65 percent is international.
Of that 35 percent, some will be income-focused. This means that although it is a meaningful pool of capital, it’s still the minority of the pool of capital. What this often means in practice is that an appetite for dividends is something established companies are more likely to see as an issue when they have to pay out to investors rather than reinvest to try to drive growth.
The challenge is moving away from income to growth. For new companies coming to market, however, investors know what they’re getting – these companies can just market to non-income investors.
Kelly also points to multiple other factors affecting listing choice – such as which market is most important to the firm. Denmark-founded Trustpilot (see Opening bell) and Canadian firm Alphawave are examples of how the very nature of tech firms often means their target market might not necessarily be where they were founded, he says.
‘While it will always be the case that some companies will choose Nasdaq or the NYSE to tap into the huge US market,’ Kelly says, ‘for the first time, we’re seeing London not only as a magnet for UK companies, but for EU companies and North American companies, too.’
The idea of tech For Long, part of the problem in the UK – as highlighted by the FCA – is not only that tech companies have been typically choosing the US over the UK, but also that companies have been choosing to stay private for longer. ‘That makes it really hard for individual retail investors to take advantage of those opportunities,’ he notes. So how do you encourage more growth companies to go public? And to do so in London?
Long sees the rule changes, particularly around dual-class shares, as going a long way to attracting the sort of firms that feel strongly about maintaining control, but says perception is also part of it.
‘One of the things we’re mindful of is that if you think about tech firms, they’re kind of synonymous with Silicon Valley,’ he says. ‘That’s where everyone’s successful, that’s where it’s all going on.
'There’s almost a prestige. And I wonder whether, because tech firms traditionally list in this US tech hub, that becomes almost the automatic position. Companies look to list in the US because that’s where everyone else is. That will take time to shift – but there’s got to be a tipping point.’
While retail is booming in North America – IR Magazine research indicates that in the past year alone there has been a 3 percentage-point rise in individual share ownership, now standing at an average 17 percent of the shareholder base – the same hasn’t necessarily happened elsewhere (see Selling the retail story). The research doesn’t separate out UK findings, but in Europe retail share ownership remains unchanged year on year, at 11 percent.
In the UK specifically, Charlie Walker, who heads up equity and fixed-income primary markets at London Stock Exchange Group, cites retail as an example of where regulations have not kept pace.
‘Retail inclusion is a good example of where rules could be updated,’ he says. ‘In the UK, a company has to have its IPO open for six days if it wants to offer to retail investors. We think that dates back to when people used to post prospectuses via Royal Mail; you had to allow time for people to receive a document and then read it. Nowadays, that’s actively deterring companies from including retail investors.’ Something to add to the review pile.
