What’s behind the FTSE exodus?

Recent months have seen cash flood into the City to snap-up publicly listed companies, while a worrying trend has emerged of fewer companies wanting to list on London’s stock market.

UK capital markets have been described as a ‘backwater’ in the years since the 2016 Brexit referendum, with foreign investors averse to the extra risks and headwinds – and potential lack of reward – on offer in the wake of the country’s departure from the trading bloc.

Yet, while some may be keen to point the finger solely at Brexit, it’s not the only problem. The UK stock market has also developed a reputation as one for more traditional companies, while technology-focussed firms pick the US instead. 

One problem is that as prized firms are bought out by private equity, new exciting companies are not taking their place.

The Government and City regulators have been looking at ways to respond the trend in efforts to make London a more attractive destination for public companies, but experts warn there are no easy answers.

London’s capital markets continue to face a cloudy outlook 

While it is not the only impediment to London’s pull when compared to rival markets like New York or Hong Kong, Brexit has weighed on Britain’s attractiveness as a destination to invest or list a business.

Chief economist and head of research at investment bank Panmure Gordon Simon French said: ‘Historically large investors allocated more to the UK than its economy probably justified because it had decent returns, an outsized financial sector and a relatively stable currency.

‘Since 2016, international investors haven’t taken a view on whether Brexit is good or bad, but they see it has created a lot of volatility in sterling and political instability. As a result they reduced their exposure to the UK.

‘If you’re being constructive, you would argue that as the dust settles, political stability improves, some of the costs of Brexit become more obvious, and some of the fears over Brexit don’t get realised, you can start to price the impact on UK companies more appropriately.

‘But at the moment that has been a trickle rather than a flood.’

Weak liquidity, a tough regulatory burden and relatively small market capitalisations have also been cited as contributors to a heavy discount in the valuation of listed UK companies and the cost of raising capital on the stock exchange.

This is evidenced by a 40 per cent fall in UK initial public offerings since the 2008 financial crisis, according to the UK Listing Review, as well as high profile snubs of London markets in favour of competitors, such as that of Arm. 

AJ Bell managing director Kevin Doran said: ‘The loss of Cambridge-based chip designer, ARM Holdings, to the US market has clearly stung the Government and FCA hard. 

‘As the crown jewel of the domestic tech sector, the fact that the company chose the US as its new home when returning to public markets is a sign of how far the UK has fallen since the company de-listed in 2016.

‘Like a bouncer at a nightclub, the London market has traditionally adopted a stricter dress code than most when it comes to listing rules, whether in the form of restricting dual-listings, votes on major transactions or requiring fuller levels of disclosure when raising capital.’

The relatively small market capitalisations of UK firms make it difficult for big investment funds to allocate to them, which is only becoming a bigger problem as a result of the rapidly consolidating asset management industry.

CEO and founder of business advisory group Trachet, Claire Trachet said: ‘In terms of listing, there is often more potential in the US compared to the UK, so when you are a tech company in the Europe [for example], there will always be the question of whether you should list in your home market or go to the US.’

Lured by the perception of low valuations and a weaker pound, recent private takeover bids include Dechra Pharmaceuticals, John Wood, THG and Hyve Group, while reports suggest Watches of Switzerland is also attracting interest. 

April saw a flurry of private equity bids for UK firms

April saw a flurry of private equity bids for UK firms

The trend has grown in recent years, with a record 2021 that saw private equity complete 863 UK transactions followed by the second most active year ever in 2022, according to KPMG.

And there’s little sign of the trend abating, with a report from Bain & Co revealing that private equity firms are still sat on a record £3.7trillion of unspent cash.

Trachet said: [Private equity] investors are no longer frozen; they know that there will be opportunities and they are ready to actively seize them.

‘They also know that a lot of these opportunities will be coming from struggling companies, so acquirers know they will be getting a bargain, which presents a more positive outlook for activity.’

Victoria Scholar, head of investment at Interactive Investor, added: ‘Opportunistic private equity approaches are likely to continue as they look to deploy their dry powder on underappreciated, and cheap, assets. 

‘This means unloved UK assets will likely continue to catch the eye of deep pocketed US PE houses. 

‘The weakness of the pound adds to the UK’s draw, with sterling’s rebound suggesting PE investors need to move quickly before it’s too late to capitalise on that FX benefit.’

But the takeovers also represent the fact that many companies feel they will be better positioned for growth with the help of private capital, as opposed to raising cash on public markets.

The FTSE 100 has lagged US and European peers in recent years

The FTSE 100 has lagged US and European peers in recent years 

On Tuesday (2 May), AIM-listed Plant Health Care became the latest company to reveal it is evaluating its future on the exchange with bosses ‘frustrated’ by its share price performance since listing.

Similarly, Italian entrepreneur Gabriele Cerrone, who floated Okyo Pharma in July 2018, said recently that building a biotech company in the UK ‘is like trying to grow plants in the desert’. 

Explaining his decision to delist the stock on 12 May, Cerrone said the volume of shares traded in London is ‘negligible and does not justify the associated costs’.

The Financial Conduct Authority revealed plans to reform and streamline listing rules this week to ‘help attract a wider range of companies, encourage competition and improve choice for investors’.

FCA chief executive Nikhil Rathi said: ‘Our proposed reforms would significantly rebalance the burden of regulation to the benefit of listed companies and investors who are willing to set their own risk appetite and terms of engagement.

‘While regulation plays an important part, a company’s decision on whether, and where to list, is influenced by many factors so substantive change will require a concerted effort from government and industry as well.’

But Panmure Gordon’s French, who previously worked in the cabinet office as chief of staff to the UK Government COO, warned that there is ‘no silver bullet’ to improve the attractiveness of listing in London.

He said: ‘It’s not the UK is an expensive place to list, we’re not internationally uncompetitive in that regard. It’s not even a particularly onerous reporting burden.

‘But I’ve lost count of the number of Treasury or regulatory recommendations on corporate governance that apply to “all public companies”.

‘If you want to reduce your reporting requirements there’s an incentive to remain private and raise your money in private capital markets.

‘That’s a more salient feature of why companies at the moment are pretty open to the idea of being bought out by private equity and being taken private.’

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