The pool of UK-listed firms continues to decline as private equity funds snap up undervalued companies
[LONDON] London has slipped out of the world’s top 20 initial public offering (IPO) markets as the third quarter ends, overtaken by Mexico and Singapore in a fresh blow to its standing as a global finance hub.
The UK exchange has slipped three places to 23rd in a Bloomberg ranking of the world’s busiest IPO destinations, placing it behind the frontier market of Oman. Volume this year dropped 69 per cent to US$248 million, the weakest haul in more than 35 years.
This year’s largest London IPO, an April offering from accountancy MHA, raised £98 million (S$170 million).
No deals have involved a major Wall Street bank; they were instead arranged by small local outfits such as Cavendish and Singer Capital Markets. The third-quarter picture is even starker with just US$42 million of deal volume, down 85 per cent from the same period last year, according to data compiled by Bloomberg.
London’s centuries-old role as an international financial centre has been eroded by competition from European rivals and rising hubs in Asia and the Middle East.
Lower valuations have fuelled an exodus of companies to private buyers or New York’s deeper capital markets. That’s diminished London’s importance from the days when it was regularly one of the world’s biggest IPO players.
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“When valuations are low, private owners hesitate to IPO at a discount, while listed firms become takeover targets instead,” said Leonard Keller, a portfolio manager at Berenberg. “The UK has interesting companies, but London’s valuation discount can be an entry point for private equity.”
The numbers show how swiftly London’s fortunes have fallen over less than two decades.
In 2006, fundraising peaked at an all-time high of US$51 billion with listings from Scottish insurance giant Standard Life, department store owner Debenhams and Russian oil major Rosneft. This year’s total is down 99 per cent from the same period in 2006.
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As recently as 2013, UK IPOs accounted for more than half of the European fundraising total. That share has dwindled to 3 per cent this year, according to data compiled by Bloomberg.
Other markets are in the ascendancy. Singapore jumped to 9th place this year with US$1.44 billion raised, driven by property trust listings. Mexico ranks as the 19th-busiest listing venue this year with US$460 million of deals, nearly double London’s volume. Both recorded little or no activity last year.
London IPO volumes remain slightly higher than Norway, the West African regional bourse known as BRVM, and Croatia.
Barney Hussey-Yeo, chief executive officer of British fintech startup Cleo AI, said that the lack of London IPOs will have a ripple effect leading to less talent, tax revenue and wealth creation in the UK.
“When you speak to the successful founders in Europe, they’d tell you that the London Stock Exchange (LSE) is not fit for purpose,” Hussey-Yeo said.
Losing out
As fewer large companies go public in Europe, the region’s stock exchanges are fighting harder to win the biggest listings.
London was competing with Stockholm, Amsterdam and Zurich to host Hellman & Friedman’s IPO of alarm company Verisure, which is targeting to raise more than three billion euros (S$4.5 billion). It ultimately lost out to the Swedish capital.
Consumer goods giant Unilever selected Amsterdam as the main listing venue for the spinoff of its Magnum ice cream unit, with London and New York getting secondary listings.
Defence manufacturer Czechoslovak Group, aiming for a valuation of 30 billion euros or more in an IPO next year, was considering London before opting for Amsterdam due to its friendlier regulatory regime, according to sources familiar with the matter.
The pool of UK-listed firms continues to decline as private equity funds snap up undervalued companies. KKR has made takeover approaches to at least three companies on the London market this year. Bain Capital, Blackstone, Brookfield, ICG, Macquarie Asset Management, Permira, Stonepeak Partners and Warburg Pincus have also pursued deals in recent months.
A sense of just how undervalued some stocks have become emerged when a bidding war broke out for Spectris, a maker of precision testing equipment. KKR ended up beating out Advent and agreed to buy Spectris for £4.2 billion – more than double its valuation before the approach.
“Private equity is taking companies off the market, but they are not then bringing them back when they work their magic on them,” said Rupert Soames, a City of London grandee who now chairs the Confederation of British Industry. “The fact is, there’s been a net loss.”
UK authorities have rolled out reforms to reinvigorate the public markets. Those include relaxing rules around dual-class share structures, making it easier to raise additional funds and loosening guidance around executive pay.
FTSE Russell, which compiles the blue chip FTSE 100 index, last week started allowing stocks not trading in British pounds to be included in UK indexes and lowered the bar for firms to fast-track into the indexes after IPOs.
LSE CEO Julia Hoggett has pledged to boost London’s junior AIM market and is pushing a new venue for investors to trade shares of private companies.
‘Avoid the UK’
Companies are shifting away from London. Wise plans to move the money-transfer company’s primary listing to New York to tap deeper pools of liquidity.
Top British drugmaker AstraZeneca said this week that it will directly list its regular shares on the New York Stock Exchange instead of American depositary receipts, upgrading a listing where it already sees strong trading activity.
“Momentum is an important factor, and the commentary, certainly from some larger UK-listed companies, is the view that there are better equity valuations to be had in the US,” said James Congdon, who runs the Quest research division at Canaccord Genuity Group. “Sadly, that sends the message that it may be best to avoid the UK.”
The wider UK market malaise has led stockbrokers including Peel Hunt and Zeus Capital to cut staff. Peel Hunt said in June that its loss widened in the latest financial year as it grappled with restructuring costs and a dearth of London IPOs. It’s since adopted a more hopeful tone, saying it’s tracking ahead of expectations thanks to M&A work and “nascent” ECM activity.
London’s IPO market will see some more deals before the end of the year. The Beauty Tech Group, maker of Tria Laser hair removal devices, has been taking orders for an IPO that could value it at up to £320 million.
Canned tuna producer Princes has also been considering going public in the UK this autumn, Bloomberg News has reported. Fermi, an energy Reit co-founded by former US politician Rick Perry, is planning a secondary listing in London after its Nasdaq IPO.
A spokesperson for the LSE said that it’s encouraged by the pipeline of companies looking to IPO in the coming months. They added that IPOs are not the only indicator of the health of the UK capital markets, with activity in follow-on offerings remaining strong.
The bigger boost could come next year. Hg-backed software firm Visma, which was last valued at 19 billion euros, has provisionally picked London for a 2026 float that could rank as the market’s biggest IPO in years, Bloomberg News has reported.
British travel agent Loveholidays and Uzbek gold miner Navoi Mining & Metallurgical are also planning London listings, sources with knowledge of the matter have said.
But for now, rival European venues have stronger pipelines of upcoming listings, and the US remains the preferred IPO venue due to its higher valuations and more receptive investor base, according to Valeriya Vitkova, senior lecturer at the Bayes Business School in London.
The UK stamp duty on stock trades and British funds’ low allocation to local equities are among factors dragging down the market, said Soames from CBI. Still, he expressed confidence that rule changes could help turn things around.
“There is huge momentum now about getting reform to regulation,” he said. “London is still preeminent, so don’t give up hope.” BLOOMBERG