As there was no agreement in sight before the 31 March deadline for the UK’s access to the EU’s financial sector on the basis of the equivalence of the two regulatory frameworks, the exodus of EU-based companies listed on the London Stock Exchange has come about as anticipated.
Any UK financial provider intending to sell its products in the EU now has to register an operation in the bloc to do so, and vice versa. In a similar vein, the EU’s share trading obligations mean that post-Brexit, its stocks need to be traded from EU-based venues. As a result, by January Amsterdam had surpassed London’s as Europe’s top trading centre, with an average of £8.4 billion of shares traded a day after £6.5 billion of deals shifted from London.
January and February saw London-based electric vehicle maker Arrival and UK betting firm Genius Sports Group Ltd going public on the New York Stock Exchange rather than in their domestic market. But, from a global perspective, IPOs haven’t really been London’s thing anyway, with the City accounting for only 5 per cent of IPOs completed around the world in the past five years.
The magic powers of the Lord Hill Review
The turning point was the publication of the review launched in November by Rishi Sunak to identify techniques to not just restore the LSE’s pre-Brexit power, but also offer an attractive alternative to companies deliberating an IPO in New York.
Jonathan Hill, Britain’s former EU commissioner, who led the review on the UK’s listing regime, made two main recommendations. One was about allowing the dual share structures on the LSE’s premium FTSE 100 and 250 segment, which breaks with the one share, one vote principle to allow founders to initially retain more control over their company by allocating shares to them that carry more than one vote.
The other aims at reducing the free float requirement – the proportion of shares publicly traded – for an IPO from 25 to 15 per cent. All changes recommended are along the lines of making the floating process better value and less bureaucratic.
Admittedly, Lord Hill is no cheerleader for special-purpose acquisition companies (SPACs) or outfits that have no commercial operations but are set up for the sole purpose of turning a private company public by acquiring it – a practice that caught on in the US during the pandemic. However, out of expediency rather than conviction, he has been suggesting that this fast track to listing should be endorsed in the UK if London is to attract more high-growth tech firms.
Indeed, the two UK-based companies mentioned above, which voted for the New York Stock Exchange with their feet, both went public via a SPAC-merger. And to prove Lord Hill right, the promise of London running a menu of more choice and better value for listings – along with some wooing from the Prime Minister himself – was enough to convince cyber-security firm Darktrace and remittance fintech Wise (formerly Transferwise) to opt for the UK capital rather than New York or Amsterdam.
Wise, flush with capital, went public via direct listing, a method that has generated a lot of debate about transparency and accountability even on the other side of the pond, as it is a scheme where shares are sold that directly exclude underwriters. Although enticing Wise to London sounds like an achievement, an opinion piece in the Financial Times labelled direct listing as “not an innovation but an invasive species”, implying that its introduction in Britain is not welcomed by all.
A report by the University of Edinburgh from October 2020 on the dominance of private over public equity also suggests that educating investors to bring about a change in prevailing attitudes would be also key to increasing the number of IPOs, as well as the amount of available private equity in the UK. They should become more appreciative of the value of companies whose assets are dominated by intangibles and those which, unprofitable though they might be, have some proven revolutionary technology or business model behind them.
Liberalisation won’t by itself lead straight to a spike in IPOs, the report also maintains. The FTSE 100 is still dominated by low-growth, mature corporations, and London lacks the legions of analysts, investors and advisers that concentrate around the NYSE. But taking the first steps to attract prestigious tech companies to the UK capital may cut across the chicken-or-egg dilemma, and the increasing gravity of a growing tech hub will be enough to attract expert personnel and further capital.