Deep Dive: Can the UK be an IPO hub?

Valuation and SME dilemma

Cristian Angeloni
clock • 4 min read
'The ingredients for the UK to re-establish itself as a successful IPO hub exist, however we simply are not convincing our native-born investors and entrepreneurs that we have the right environment in which to launch.'
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'The ingredients for the UK to re-establish itself as a successful IPO hub exist, however we simply are not convincing our native-born investors and entrepreneurs that we have the right environment in which to launch.'

The state of UK capital markets has been described as “significantly concerning” by several industry players, damaging the country’s attractiveness and its ability to raise capital.

Interest in UK public markets has been waning over the last few years, with domestic interest continuously decreasing and initial public offerings drying up.

Earlier this year, 2023's biggest UK IPO, CAB Payments, showed promise when it listed in July, with a market capitalisation of £851m, raising £335m from investors.

Investors accuse CAB Payments of limited risk disclosure in IPO prospectus

But since listing, its share price has dropped around 81%, from 303 pence to 57.6 pence as of 13 December, according to data from the London Stock Exchange.

Simon Rafferty and Sunil Dhall, co-chairs of the UK Equity Markets Association (UKEMA), said the current backdrop of languishing IPOs was damaging the UK's "economic standing", as public markets are the "lifeblood" of any economy.

They said small and medium enterprises have been the most affected, which historically had been able to use public markets to raise capital and bolster economic growth.

Rafferty and Dhall said the government's Mansion House reforms, alongside the Financial Conduct Authority's reforms to the listings regime, should inject the UK's public markets with fresh capital and offer greater opportunities to domestic and foreign businesses.

But Patrick Farrell, CIO at Charles Stanley, argued there was one ‘gap' London needs to address in order to become an IPO hub: the "protracted problem" surrounding valuations.

This year alone, several companies, such as SoftBank's Arm, veered away from London in favour of Wall Street to achieve much higher valuations.

Farrell said: "If a company can achieve a significantly superior market valuation by rejecting London for New York, it makes sense to list there.

"UK companies are valued 18% less than their US peers, according to an analysis by the Evening Standard earlier this year. At that time, the market value of the FTSE 100 would have been almost £500bn higher if its constituents had listed on Wall Street."

London IPOs drop to just five in Q3 2023

Farrell added the valuation problem is "not only to do with money".

Low valuations could leave companies "vulnerable to bids from private equity or similar businesses listed in jurisdictions with more highly rated equity", he said.

The proposed reforms may also not provide all the solutions, according to Farrell.

He pointed to concerns that the FCA's proposals to remove the ‘premium' listing segment could "water down" protections for investors, although he argued the proposed "tweaks" will likely not make a major impact.

He suggested the LSE could become an "IPO in specialist areas" if it was able to nurture talent and start-ups, but "closing the valuation gaps [still] looks like it might be a struggle".

"Even the strongest swimmer cannot swim against the tide," Farrell said.

FCA: Changes to listing rules will make UK 'market of choice'

Bill Blain, market strategist at Shard Capital, noted it was not just London listings which were suffering.

He said most of the roughly 150 IPOs in the US this year tumbled below issue price. The only gains came from the ‘Big Seven' mega-tech stocks, without which the "S&P flatlined this year", he said.

Blain listed several reasons for such a slowdown in IPOs, including interest rates remaining higher for longer, creating liquidity issues for corporates and hitting consumer spending.

Additionally, investors have moved away from ‘growth', prioritising profits, fundamental upside and market scale.

As a result, despite the innovation created by UK companies, entrepreneurs have been choosing to "sell themselves early to access the US market, where the scale and multiple of rewards vastly outscales what they could make in the UK", Blain argued, echoing Farrell.

UK listings framework continues to dampen IPO appeal

He continued: "The ingredients for the UK to re-establish itself as a successful IPO hub exist. However, we simply are not convincing our native-born investors and entrepreneurs that we have the right environment in which to launch.

"We are waiting for the next election to move on with reopening the UK, and improving the underlying sentiment requires the catharsis a new government will provide. But it could happen."

According to UKEMA's Rafferty and Dhall, there are several changes needed to make this a reality.

For instance, they called for greater incentives to be provided to investors in listed companies - such as in the creation of a dedicated ISA - as well as the removal of stamp duty from all listed SMEs, and exempting fully-listed small companies from inheritance tax.

Research on smaller companies has also been "significantly cut" since the introduction of MiFID II in 2018, they said, and without this "investors cannot make informed decisions, particularly on SMEs".

Rafferty and Dhall added: "As Britain seeks to build a global role outside of the EU, we now need to regulate differently and more pragmatically. Regulation should not be there to eliminate all risk.

"This will be a significant change of direction for our country and we need politicians, legislators and regulators to embrace this new paradigm."

They continued: "There is not just one measure that will provide the answer to ensuring the UK remains an IPO hub.

"It will require bold thinking and creativity to not only unlock liquidity and domestic support for SMEs but also attract further foreign investment. This is the challenge for our government, regulators and industry."

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