Why London works for IPOs

According to the London Stock Exchange Group (LSEG), London has ranked seventh globally for IPO volumes over the last five years. In 2019, 2020 and 2021 it was top five. During 2023, LSEG reported over $22.1bn of capital raised in London from IPOs and follow-on proceeds.

It predicts a revival in activity over 2024, reporting that there is an elevated level of IPO preparation and early-stage conversations currently underway. From our own activity and discussions with other IPO practitioners, we agree with LSEG’s forecast.

We think that London’s advantages for growth companies seeking a public listing, particularly compared with US markets, are now coming into focus.

While the US remains the world’s largest and deepest equity market, few UK issuers have achieved a successful US IPO. In the last 10 years, there have only been 21 UK companies that have managed to raise of $100m through a US IPO, reports LSEG. Of these, five have since delisted and the majority trade below their IPO price, with Dealogic data showing that the average post-listing share price performance of UK companies that have completed >£100m IPOs being a 13% decline.

Reforms boost London’s competitiveness

The UK listing regime is currently undergoing significant reform to ensure London stays competitive on the global stage whilst maintaining high standards of governance. Key reforms passed and proposed have enabled listed companies to quickly raise larger amounts of follow-on capital, enabled dual class share structures at IPO and are seeking to provide listed companies with greater flexibility to execute major corporate transactions.

The currently proposed reforms are the most significant since the 1980s and are due in the middle of 2024. According to LSEG, the updated rules will be “fit for the needs of existing companies, the next generation of high-growth companies this country produces and the investors seeking to support them as they scale”.

Attracting a broader range of investors

London has a distinct advantage over other stock exchanges by virtue of the wide pool of investors it attracts. This geographic breadth helps to increase diversity as well as increase stability in corporate share ownership registers. Over 57% of UK quoted shares are held by overseas beneficiaries, including a high proportion of US investors; across the FTSE 250, the average holding of US investors is 29%. This geographic breadth helps to increase diversity and stability in share registers, providing depth and firepower to support companies’ growth strategies.

Generally speaking, it is also easier for UK companies to list in London and capture the full benefit of that listing. Companies that list in the UK are eligible for inclusion in the FTSE index series, subject to them meeting certain criteria. These criteria are more stringent for overseas issuers and also compare favourably to the inclusion criteria for overseas indices, for example, the S&P 500. Index inclusion brings additional ownership demand and liquidity, as well as international profile. The range of publicly listed companies makes London attractive to index-tracking investment funds and passively managed funds.

In contrast, the US market is dominated by a handful of stand-out, large companies. This can make it harder to catch the attention of public market investors, either active or passive. A company with a £1bn market capitalisation would rank among the top 25 largest technology companies listed in London – but would only be considered a small-cap company in markets on the other side of the Atlantic and unlikely to qualify for major US indices, limiting investor awareness and traction.

A lower risk environment for company executives

A public listing brings with it a beneficial profile for companies and executives, but also a more demanding regulatory environment.

While public company directors take responsibility for the content of IPO prospectuses, shareholder circulars and some follow-on offering documents, the UK legal regime is more benign than in other markets, particularly the US, where directors can face personal criminal liabilities in relation to many company filings. The US also sees a materially higher frequency of class action lawsuits brought by shareholders against individual directors for misleading disclosures. LSEG reports that there were 218 new securities class action lawsuits filed in the US in 2021 alone. This compares with just five class actions filed in the UK since 2010 (based on LSEG estimates).

Less onerous personal legal responsibilities mean Directors & Officers insurance costs are likely to be lower for UK-listed companies. The LSEG describes a ‘right touch’ approach to regulation – not too heavy, not too light – balancing shareholder protection with operating efficiency.

An important consideration for owners of companies seeking an IPO is transaction costs. These are lower in the UK than many overseas markets, in particular underwriting costs, which typically form the majority of IPO expenses. Broadly speaking, these are around 50% of commissions charged on US IPOs. Lower costs reduce execution risk for owners and limit value leakage, meaning that a larger proportion of IPO proceeds can go to the company and its existing shareholders when it floats.

Share price stability and growth

While an IPO can be carefully planned and executed, what happens next isn’t always so easy to predict or control. First-day churn, characterised by large share price swings, can make a stock market debut volatile. London has a reputation for lower first-day churn for IPOs. The quicker an IPO share price stabilises and volatility recedes then the sooner a newly floated company can concentrate on applying investment proceeds to achieve its growth targets.

Another significant London benefit for growth companies is accessing additional capital.

Follow-on fundraising transactions either involve the sale of existing shares by a shareholder in the company (secondary fundraising) or the issuance of new shares by the company itself (primary fundraising). Recent regulatory reform means companies can very quickly and easily issue up to 20% of their existing equity to fund growth initiatives, including acquisitions. Secondary sell-downs by existing shareholders provide additional liquidity as well as means to cleanly crystalise value for large existing shareholders.

London dominates Europe for secondary issuance. London raised more capital in 2023 than the next two European exchanges combined (Stockholm and Frankfurt). In Q1 2024, £7bn was raised in London with momentum growing through Q2 to date. Just this week, National Grid announced a £7bn capital raise to double its investment in infrastructure to support the energy transition, whilst London commercial landlord Great Portland Estates announced plans to raise £350m to support a growing pipeline of acquisition opportunities. These transactions will bring London’s total deal value this year to c.£20.7bn.

Headwinds remain, but are fading

Like all stock markets, London faces challenges. The swirl of macroeconomic and geopolitical uncertainties can hamper IPO activity. Private markets continue to develop, deepen and attract capital from asset allocators. Higher interest rates attract investors to cash and fixed-income products as they offer attractive risk-adjusted relative to equities. This raises the bar for the level of returns investors expect for the higher risk of buying shares.

However, with inflation in major economies under control we are seeing interest rate stability return. Equity market volatility has returned to benign levels conducive to increasing risk appetite, which is reflected in early signs of increasing inflows into equities. The FTSE 100 has hit all-time highs in recent weeks and kept pace with US and European indices.. Improving economic growth outlooks in major economies, as well as a reduction in political uncertainty later in the year, should provide further macroeconomic tailwinds. The UK government’s decision to call an earlier than expected general election will accelerate political clarity, supporting increased certainty and confidence for corporates.

Highlights from Investec’s IPO Conference

Investec has built a reputation over the last 10 years for delivering high-quality UK IPOs. We have helped shareholders monetise their stakes in privately held companies through public listings and have also supported newly floated companies in raising capital for the next stages of their growth, at IPO and subsequently.

Our 2024 annual IPO Conference brought together business founders and their owners, provided an update on the IPO market and explored the benefits of a public listing in the UK. Guest speaker Sir Tim Martin, Founder and Chairman of JD Wetherspoon, talked about why he decided to float the company for £45.6m in 1992, some benefits and challenges of being a listed company, and why he has chosen to stay listed.

Key highlights:

• The conference offered clear cause for energy and optimism following a subdued period for new IPOs
• Macro conditions indicate a return to economic growth
• The IPO window is opening: now is the time for companies to start thinking about IPOs
• Sir Tim Martin believes “flotations are an important way of channelling capital to companies who need it.”
• A panel of investors agreed on the importance of IPOs in sustaining vibrant equity markets and providing opportunities for them to outperform

Important information:

Investec Bank plc provides this media for information purposes only. The opinions featured are not to be considered as the opinions of Investec and does not constitute advice. It is advisable to contact a professional advisor if you need financial advice. Your use of and reliance on any of this content is entirely at your own risk.