Criticism of the City as a place to list is overblown, argues Headland’s Matt Denham
You don’t have to look hard to find criticism of the City as a place to list. So the story goes, post-Brexit Britain is losing its lustre as a financial centre, as evidenced by the flood of firms listing elsewhere, and the dearth of IPOs in London.
According to this alluring narrative, companies that would have once seen the London Stock Exchange (LSE) as the obvious option are rushing across the Atlantic in search of listings. The US, it is claimed, offers more engaged investors, better valuations and less burdensome rules.
Critics point to the float of Cambridge-based Arm on NASDAQ, while Ferguson, a former FTSE 100 constituent, defected to the US last year. Flutter is on the cusp of a secondary listing in the US, while Plus500 and YouGov have also threatened to move.
Today the LSE hit back. Speaking to the FT, its boss David Schwimmer claimed fears of a loss of business in the UK were ‘a kind of clickbait’ and called the negative commentary about London ‘overplayed’.
He has a point. While the US equity market has undoubtedly outperformed the UK, its strong relative performance is attributable almost entirely to a handful of mega-cap tech stocks such as Amazon, Tesla, Nvidia and Google.
By the same token, although there will always be exceptions to the rule, many of the myths about a US listing are not generally borne out by reality. Trading liquidity in the UK is broadly on a par with US and European markets; the dearth of recent IPOs on the LSE is largely replicated in other geographies; and there is limited evidence of overseas listings into the US attracting significantly higher valuations (all else being equal).
This is not to say that the UK market doesn’t have issues that need to be resolved for it to compete on the international stage. We do not, for example, have the same equity ownership culture as our US counterparts. UK stock ownership by UK pension funds has declined dramatically over the last two decades, from 39% in 2000 to just 4% today, while only 11% of UK household assets are invested in shares (as compared to nearly 40% in the US). At the same time, dual class share structures are all but unavailable for companies seeking a premium listing on the UK market, and the EU’s MiFID II rules have reduced the level of sell-side analyst coverage of smaller UK companies.
But all is not lost. Reform is underway to try and put the UK back on a level playing field. In his Mansion House speech in July, Chancellor Jeremy Hunt announced a range of measures to improve funding for high-growth companies and to strengthen the UK’s position as a listing destination; an FCA consultation paper published in May includes proposals to simplify the UK’s listing and eligibility requirements, including a more permissive approach to dual class share structures; MiFID II rules relating to analyst research are set to be relaxed, potentially paving the way for better coverage; and retail participation in equity issues is being buoyed by platforms such as PrimaryBid and REX.
So, what does this all mean for a UK company considering its listing venue? Undoubtedly, the attractions of the US shine bright, but even businesses that would be considered a sizeable mid-cap in the UK run the risk of getting lost in the US.
Much better, in my view, to be a more prominent player in the UK, taking advantage of the UK’s large and internationally diverse pool of investors and reputation for world-class corporate governance. Good companies with demonstrable track records and attractive prospects, which can clearly articulate the strengths of their investment case, will thrive in the UK and attract the engaged and supportive investors they deserve. The grass is not always greener!
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