Britain’s financial regulator has tabled proposals aimed, in part, at making listing on the London Stock Exchange more attractive to early-stage companies but it’s by no means certain that a set of regulatory changes will be enough to persuade tech companies that the U.K. rather than the U.S. represents the best IPO option. Or even, it has to be said, that listing is a good idea.
Some alarm bells started ringing in March of this year when ARM announced that it was to list in New York rather than London. Now, it has to be said that the chip manufacturer is a long-established company with a corporate owner rather than a youthful scaleup but it has been seen by many as a poster child for Britain’s technology sector. Thus, its decision was seen as a shot across the bows for London.
You could argue, of course, that one departing swallow does not mean that Autumn has arrived but since then there have been other worrying developments. In early May, a co-founders of financial services company Revolut signaled the company would not list in London when the time came for a flotation. Meanwhile, a South African renewables company Solgenics has announced plans to delist from London’s Alternative Investment Market because of the cost of regulatory compliance.
Against that backdrop, the Financial Conduct Authority’s proposals are, to say the least, timely. Essentially, the regulator is proposing to streamline the listings regime, in part to encourage early-stage, fast-growth companies to choose, or at least consider London.
Simpler Listing Rules
A key pillar of the proposals is the replacement of the current “standard” and “premium” listing categories with a single tier. This, it’s thought, will simplify a currently overly complicated regime. And as Claire Keast Butler, a partner at law firm Cooley points out, the eligibility rules are also set to change.
“The removal of eligibility rules requiring a three-year financial and revenue earning track record as a condition for listing could help to facilitate London listings by earlier stage companies,” she says.
But here’s the question. Changes in the regulatory structure may make it easier for young companies to list but reform of this type won’t necessarily stem the flow of IPO hopefuls to the New York markets or convince waverers that listing is good idea.
Phill Robinson, is a founder at Boardwave, a community of over 750 founders, CEOs and software professionals. In his view, there are some fundamental but non-regulatory issues.
“Currently, a high growth software company would not sensibly list in London and, if it did, it certainly wouldn’t get full value,” he says. It’s been proven, over many years, that public tech investors in the UK are not as experienced or sophisticated as those abroad.”
One key problem is a lack of knowledge. As Robinson points investors in the UK markets are not particularly tech-oriented.
“The challenge is predominantly around the lack of knowledge and experience in technology from investors in public markets locally, meaning they often struggle with how to value software companies,” he adds.
Naureen Zahid, Director of Investor Relations at VC firm OpenOcean agrees. “It’s clear that the UK market dynamics have been shifting, prompting a growing number of firms to consider listing in the US. There are multiple factors behind this shift. One of the most important concerns is the trading environment. The US offers access to a much larger pool of capital, as well as a market with far more tolerance for risk in backing new and innovative products – even at earlier stages in their growth trajectory,” she says.
Investor Expectations
Yoko Spirig, co-founder and CEO of share option company Ledgy below says her company would “definitely consider” listing in London, but there are caveats. “It’s hard for early-stage companies to really feel like they understand what they’re getting when they’re opting for one exchange or another. For instance, London is seen as a traditional home for mining and oil companies – does this give younger, sustainability-focused companies confidence that the FTSE will be a good place to develop further?” she says.
And as Spirig adds, a listing – and this applies pretty much everywhere, not just London – places new requirements on businesses to please investors in a very public arena. In the cold hard light of investor expectations, short term expectations rather than long-term strategy may drive the sentiment of investors.
“ A lot of early-stage companies are working towards a 20-year mission and vision, particularly if they are working on deep technologies. It’s very difficult for many executives to suddenly pivot to quarterly results and analyst briefings. Being judged on the short term is part of ‘growing up’ but other exchanges, especially in the US, are happy to buy into the long-term vision as well,” she says.
At this point, it’s worth asking whether London’s attractiveness as an IPO destination for early-stage tech companies matters very much. With large sums of VC and also Private Equity cash available, a listing isn’t necessarily vital in terms of raising money. And for founders seeking an exit, trade sales are the more common options.
Victor Basta is CEO of DAI Magister, an investment bank advising technology and climate companies. As he sees it, a lot has to change if London is to become a magnet for growth company IPOs. “You need the investors in public shares, a shift in mentality towards risk-risk taking and you need analysts.”
That kind of ecosystem can be built up over time but Basta asks if focusing on the creation of such an environment represents a good use of collective effort at a time when much of the “heavy lifting” in terms of the provision of capital is being done by skilled private investors. “The ecosystem around growth companies has become increasingly vibrant. We haven’t had a dependence on IPOs to do that,” he says.
There is of course the concern that without a healthy IPO market, successful technology companies simply get bought out and perhaps lose their identity within large corporations. Basta questions whether selling out to a bigger company is such a bad thing. Rhetorically whether a company like Deepmind would have performed better as an independent, listed company than it has under the umbrella of Google. Indeed, as he points out, the deal has increased Google’s investment in London as an AI center.
Phill Robinson of Boardwave sees Private Equity as an alternative to IPOs. “In a previous role I held as a European CEO, I had the opportunity to list locally and instead followed a private equity route,” he says. “There is a thriving opportunity here and a set of investors in Europe that are prepared to value high-growth technology businesses correctly. We see highly sophisticated analysts and investors in London, working for Private Equity companies, who invest billions of dollars in equity in technology companies.”
But many companies will see listing as the best option in terms of heightening their profiles, raising capital or providing an exit to backers and founders. So how can the exchange become more attractive? Robinson says part of the answer lies in recruiting the skills and knowledge that exist in the VC and Private Equity sectors into the public market.
There is, of course, no silver bullet but the FCA proposals recognise the importance of creating a regulatory backdrop that does not deter scaling technology companies, when it comes to furthering their ambitions, remembering they have a range of finance and exit options.
Read the full article here
