updated on 14 June 2022
QuestionHow have recent market conditions affected the attractiveness of London for IPOs and how have UK regulators responded to the challenge?
A mixture of Brexit, examples of poor post-listing performance and volatile markets caused by the war in Ukraine, increasing interest rates and inflation, has resulted in the lowest volume of initial public offerings (IPOs) in London since the global financial crisis. The market has seen its worst first quarter in 13 years-with IPOs only reaching a total of $530 million and only two IPOs in London raising more than $50 million in 2022.
Anywhere but London…
Numerous British companies, including the digital payments business, Zepz and Arm Ltd, a leading semiconductor and software company owned by SoftBank Group, have recently stated their intention to explore US listings rather than an IPO in London. In total, start-ups worth a total of $88 billion left London to IPO elsewhere in 2021, including companies such as Vaccitech PLC. This trend, particularly evident in the tech sector, is damaging to the reputation of the London Stock Exchange, especially in light of the efforts of UK policy makers who have been working to entice these types of start-ups to list in London. In the private equity space, although Bridgepoint became the first major private equity firm to list in London for decades in 2021, raising £300 million, the value of its shares has fallen in value by 38% since the start of 2022. Following this, CVC Capital Partners’ choice to plan its multi-billion IPO on Amsterdam’s Euronext exchange rather than London (where it has maintained its most significant presence since 1993) puts into sharp focus that this shift is not limited to a particular sector or industry.
How the UK regulators are reacting
In December 2021, the Financial Conduct Authority (FCA) published a policy statement setting out certain proposed changes to the listing regime in the UK, designed to reduce the stringency of listing applications, streamline disclosure obligations, and introduce more flexibility to continuing obligations to ensure that the UK’s public markets become a more trusted and attractive place to list. The changes are part of the government’s wider plan to reform the UK financial services sector after Brexit. Examples of some of these changes that have already been confirmed are outlined below.:
Dual class share structures
The FCA has introduced a five-year exception to the ‘one share, one vote’ premium listing principle that effectively prevents companies with dual class share structures from listing on the premium segment of the LSE’s main market. The changes bring the UK regime closer to that of the US, where dual or multi-class voting is generally permitted and has enabled Nasdaq and the New York Stock Exchange attract the likes of Facebook, Snap and Alphabet. This will enable greater flexibility and let founders retain enhanced voting rights (including to prevent a hostile takeover) in founder-led technology companies where the dual-class structure is particularly common.
Lower free float requirement
The FCA has reduced the amount of shares an issuer is required to have in public hands (ie, free float) which applies to premium and standard listings, from 25% to 10%, thereby removing a potential barrier to companies choosing to list in London and allowing founders to retain a higher stake on listing.
Changes to the Prospectus Regime
Under the current regime, inherited from the EU and subject to specific exemptions, public offers (which involve the offer of equity shares or other financial instruments to raise capital) and admissions (ie, a listing) to a regulated market in the UK are separate triggers, each requiring an FCA-approved prospectus to be published. The effect of this is onerous disclosure requirements, disincentivising companies looking to list. HM Treasury is in the process of reforming the prospectus trigger requirements such that listed companies will not need to publish a prospectus for public offers and the FCA will determine when a prospectus will be required for an admission to trading, with a view to lessening the documentation and disclosure burden of these processes.
However, some have argued that the proposed changes to the regime are too limited and fail to take full account of the successes of alternative capital-raising mechanisms such as private equity, by introducing more flexibility for issuers and instead catering too much to traditional, institutional UK plcs. In the tech market, including ThoughtMachine – one of the UK’s leading fintech companies – which is estimated to have a listing timeline of approximately three years and has expressed interest in an IPO in London, may well prove to be bellwether examples of the effectiveness of the regulators’ response. Therefore, only time will tell whether the changes succeed in addressing investors’ concerns and thus revitalising the UK IPO market.
Fiona Coffee is an associate and Venetia Hudd is a trainee associate at Weil, Gotshal & Manges (London) LLP.