Funding & Investing

London’s calling – but will corporates listen?

Published: Mar 2024

Research suggests that reports of the UK’s demise as a listing venue may be premature – but New York is expected to prove more attractive in 2024.

Red telephone box and bus in London with Big Ben in the background

PWC’s Global IPO Watch report notes that IPO volumes were subdued in the US and Europe (particularly the UK, Germany and France) last year with no European market in the top ten globally. The firm suggests increasing economic confidence as the macroeconomic landscape stabilises, growth in equity indices and a backlog of demand for exits all point to potential re-opening of western IPO markets in 2024.

Shari Mager, US Capital Markets Readiness Leader at KPMG expects 2024 to be a much better year in the US on the back of stock markets touching record highs and expectations of three quarter-point rate cuts this year starting in June.

“The pipeline is full and it will just take a couple of well-recognised companies with a record of profitability to go first and perform well in the aftermarket for others to follow provided the current benign conditions persist,” she says. “We do not expect the elections in the US to affect the IPO market much, except for a short pause in November around the week of the election itself.”

According to NYSE Vice Chair, John Tuttle, there are several reasons why companies favour a US listing. In a speech at the World Economic Forum in Davos he noted that the US has the deepest pool of liquidity and capital in the world as well as analysts and investors that are focused on growth, not just dividends and value. In addition, a US listing also exposes companies to a wider range of indices.

Data from EY indicates that IPO activity on the London stock markets fell 40% in terms of proceeds and 49% by number of listings in 2023, making it the quietest since 2010 when the firm first started collating this information.

Although inflation and interest rate pressures may ease in the first half of this year, the firm reckons upcoming UK and US elections might delay significant IPO activities until 2025.

Ledgy’s State of Equity and Ownership 2024 report presents a more nuanced perspective on London as an IPO location. While acknowledging that there were fewer companies listed on the London Stock Exchange at the end of last year than at any time since the 2009 financial crisis, more than a quarter of the companies surveyed for the report said the presence of new routes to liquidity – such as secondary share sales – rather than concerns about listing in the UK was the main factor making a future IPO less likely.

Indeed, almost three quarters (72%) of UK-based respondents said that they would choose to IPO in London over any other location.

Research published by KPMG UK in January found that 86% of European and UK equity capital markets leaders would consider listing in London – behind New York (94%) but well ahead of Amsterdam (50%). The survey also found that 91% of respondents expect the UK IPO market to return to normal activity levels in 2025.

But there is no denying that the early months of 2024 have been a mixed bag for London as a listing venue, with one of the highlights being Kazakhstan airline Air Astana’s raising of approximately US$370m from a listing in mid-February.

“Once we decided to proceed with a dual listing there was never any question we would list in London,” explains a company spokesperson. “The London Stock Exchange has strong regulatory and corporate governance standards as well as deep pools of capital to support our growth. In addition, investors already understand the potential of the region as several companies from Kazakhstan have successfully listed in London in the past.”

There is also optimism that after false starts in 2021 and last year, computer company Raspberry Pi is moving towards a London IPO having appointed an investment bank to prepare documentation.

On the downside, it has been widely reported that UK-based life sciences start-up Nuclera favours New York for a future public listing and the reputation of the London Stock Exchange has not been helped by technical difficulties. Small cap trading was halted on 5th December 2023 due to outages, following a similar incident on 19th October.

The wider European IPO market took a hit when Renault announced at the end of January that it was cancelling the planned list of its electric vehicle business Ampere scheduled for the first half of this year. The company stated that ‘current equity market conditions are not met to optimally pursue the IPO process in the best interests of Renault Group, its shareholders and Ampere’.

There was better news in February with three companies (Athens International Airport, Renk and Theon International) making their debuts on the Athens, Frankfurt Stock and Euronext Amsterdam exchanges with a cumulative initial market capitalisation of €4.66bn.

With the major US indices trading at or near all-time highs – and those of France and Germany doing the same – it would be no surprise if would-be sellers were to try and chance their arm suggests Russ Mould, Investment Director at AJ Bell.

“A run of successful deals where pricing is firm, the syndicates’ books are full and after-market volumes are strong enough to drive share price gains could persuade others to follow,” he says. “The danger then is a slew of copycat deals where the quality gets progressively lower even as the valuations get higher, but we are too early in the cycle to see that just yet – although it will be interesting to see if AI and biotechnology in particular start to see this trend in 2024.”

George Chan, EY Global IPO Leader notes that the US saw a surge in IPO proceeds in the first three quarters of last year before momentum was undermined by the weak after-market performance of September technology debuts.

“The market has made an optimistic start to 2024 with a slew of sizeable domestic listings along with a mega cross-border debut and some small international deals signalling renewed issuer enthusiasm,” he says. “Building on last year’s overall upward trajectory plus more stocks trading above their IPO prices this year, we could expect a larger wave of high-profile US offerings to emerge over the coming months, especially once the Fed starts to ease monetary policy.”

Assuming interest rate relief takes place from mid-year, Grant Humphrey, EY UK Partner, Strategy & Transactions reckons Europe’s early 2024 listing momentum could come more from advancing regional economies.

“In the first six weeks of the year we have seen several sizeable listings from Greece, Kazakhstan and Cyprus, plus a notable offering in Germany,” he says. “Listing enthusiasm across developed European economies may pick up in the second half of the year as directions of monetary policy, regulatory reforms, and geopolitical dynamics become more foreseeable for issuers and investors alike.”

It is widely accepted that losing Ferguson, CRH, Flutter and TUI among others has created a bad impression of the London Stock Exchange – and CRH’s subsequent share price surge will not have gone unnoticed by boardrooms and investors alike.

“ARM’s decision to list in the US and its initially highly successful IPO will also rankle, although the very limited free float in this stock means it is not quite the perfect test case for the relative credentials of New York and London that it may first seem,” says Mould.

He suggests the issue is largely one of valuation given the historically wide valuation gap between the UK and US equity markets, although the US undeniably offers deeper pools of investment capital and (currently) superior economic momentum.

“How much of that momentum rests upon rampant – and unsustainable – government spending is an issue that must be monitored, while the UK’s lowly valuation should really be something in its favour so far as investors are concerned,” says Mould.

“Even if financial buyers continue to show relatively little interest, trade buyers are paying attention – especially overseas buyers given how sterling has failed to recapture the ground lost in the wake of the Brexit referendum. More than 40 UK quoted firms were the subject of successful takeover bids in 2023 and the average premium paid was near 50%. Perhaps investors might like to start taking this hint.”

An FCA consultation on proposals to simplify the UK’s listing regime through the creation of a single listing category move to a disclosure-based regime closes on 22nd March, with the regulator aiming to publish final rules in the second half of the year.

In addition to consolidating the existing ‘standard’ and ‘premium’ listing share categories into a single segment with streamlined requirements, the FCA proposes to ease eligibility criteria, benefiting younger firms and those with a non-conventional structure.

The new rules would also enable more flexible dual class share structures and reduce friction for corporate strategy through fewer mandatory shareholder votes in an attempt to rebalance the regulatory burden on issuers and investors willing to define their own risk appetite.

“If implemented, the overhauled regime could eliminate some concerns from earlier stage issuers such as technology firms as well as international firms,” says Scott McCubbin, EY UK & Ireland IPO Leader. “Though the reforms may not spur an IPO surge in the near term as many factors shape listing decisions and IPO preparation takes time, they may drive visible outcomes from 2025 and beyond.”

Simon Olsen, Equity Capital Markets Partner at Deloitte reckons the work undertaken by the FCA (as well as the Capital Markets Industry Taskforce and others in the city) to improve London’s competitiveness and make changes to UK regulation should remove certain barriers that were previously causing companies to lean towards other international exchanges.

“However, in the short term, IPO activity is more likely to be driven by the underlying macroeconomic and geopolitical fundamentals including higher interest rates – and therefore debt costs – making equity a more significant part of businesses’ capital structures and investors’ exit strategies, lengthening private equity hold periods, and pent-up demand from two years of poor IPO market conditions,” he says.

Another important factor will be companies recalibrating their price expectations following the valuation bubble that was created during the pandemic. A return to more realistic pricing at listing will also improve after-market share price performance.

“In the medium to long-term, whilst regulatory reform should be beneficial to London both at IPO and as a market to remain on, this is just part of a broader package of measures needed,” adds Olsen. “Other measures include greater investment into UK equities by pension funds and other UK asset managers, greater incentives to invest in UK equities, and further discussions around topics such as executive remuneration.”

Mould reckons London is still a good home for any firm that wishes to list, especially one that is looking to build a loyal, long-term shareholder base rather than provide a quick-kill by chasing the highest valuation it can get on another exchange. “The UK excels in so many areas, including technology, media and biotechnology, and a few successful listings would be a timely reminder of that,” he concludes.

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