Stock exchanges around the world compete with each other to entice the most exciting companies to sell their shares on their markets, via Initial Public Offerings (IPOs).
London was once the financial capital of the world, and a leader in IPOs. Now it has fallen to number 23 in the global IPO rankings, having been surpassed by the likes of Mexico and Indonesia. In 2006, at its fundraising peak, $51 billion was raised on the London Stock Exchange, with companies such as Unilever and Vodafone making London their home. This year, London IPOs raised just $250 million. Even companies already listed on the London exchange, such as AstraZeneca, are shunning it for US markets.
The FCA’s diversity requirements compel companies to commit to 40 per cent women on their board, a woman in one of the top jobs, and an ethnic minority director
Many will feel little sympathy for the decline of the financiers, but they should worry about the consequences. Since 1657, when the first public stock was issued from the East India Company, publicly traded equities have been a pillar of Britain’s prosperity, giving the man on the street a stake in the great enterprises of the day.
It is also good for business. When a company IPOs it unlocks significant capital, allowing it to employ more people. Within four years of listing, the average company will have doubled its staff. This also allows companies to innovate and create products that improve people’s lives.
The reasons for London’s declining status are complex. Many point to global trends and an increasing preference for private markets. But given that US IPOs haven’t declined, and Singapore’s are the highest they have ever been, these explanations fall short.
Businesses choose not to IPO on London’s market because they are likely to generate much lower returns in comparison to global peers. This is referred to as the ‘valuation gap’. For example, BP (listed in Britain) and Exxon Mobil (listed in the US) are very similar companies. Yet Exxon stock trades at a premium 20 per cent higher than that of BP.
Choosing Britain makes little sense given these conditions. Founders will IPO in a jurisdiction where they can maximise the value of their company. Increasingly Britain’s most promising companies get snapped up by large US companies, fuelled themselves by bigger investment markets. Nowhere is this truer than our AI companies.
London’s valuation gap is driven by a lack of liquidity – that is, cash invested and its ability to move freely between assets. The reasons for this are somewhat chicken-and-egg. To reinject liquidity into our market, companies need to list in London, yet the lack of liquidity stops this from happening. Investor risk-appetite also plays a role; the relative lack of a British retail investing culture and the general lack of financial literacy don’t help either.
To stop the decline, the government and regulators should focus on what they can control. Namely, making London’s listings process the friendliest in the world. If we tear down barriers to capital, it will find its way to us.
This means a radical rejection of the post-2008 consensus that has prioritised managerialism, risk aversion and virtue signalling over success. Environmental, Social, and Governance (ESG) regulations must be the first thing to go.
For instance, the FCA’s diversity requirements compel companies that IPO to commit to 40 per cent women on their board, a woman in one of the top jobs, and an ethnic minority director. If a company fails to comply, they must publicly issue an explanation. This is anti-meritocratic, offensive to founders, and an imposition for small companies who must reconfigure their top team if they want to IPO here.
Then there are regulations introduced by the Conservative’s minister of state for energy and clean growth in 2022. These require all listed companies to measure and report all of their emissions. The cost of such reporting is difficult to quantify, but a cottage industry of consultants devoted to doing so has been created. The global carbon accounting software market is predicted to reach $67 billion by 2030, to give you an idea of the scale of the industry.
Diversity and environmental regulations encourage the ESG lobby who view them as a starting point for further regulation. For example, Legal & General, Britain’s largest asset manager, demands that the companies it invests in have formal net zero transition plans.
A founder who chooses to list in the USA will not be subject to these diversity regulations, nor forced to report their carbon emissions.
Aside from ESG, London’s 0.5 per cent stamp duty is amongst the highest of developed nations. Investors accept that loss the moment they invest their cash. If they sell a stock and buy another, the essence of liquidity, they lose another 0.5 per cent. The USA and many others have no such tax. We should copy them. This would be a gift to the industry and would cost little: you raise no money on non-existent IPOs.
Founders should be able to make it big in Britain. Fixing London’s IPO market will require a major overhaul, including reducing the tax burden to make London desirable for top global talent. But these quick wins would make a difference.
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