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Can the UK stock market get its mojo back?

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This article is part of a series on the Future of the City of London

When The Hut Group floated in September at a £5.4bn valuation, the online retailer’s chief financial officer rang a small bell in its offices near Manchester airport.

It was a modest way to mark the UK’s biggest initial public offering in five years. And a striking difference from New York where Airbnb founder Brian Chesky’s face was beamed into Times Square for last week’s IPO.

Razzmatazz is not the only area where London is lagging. While the City of London remains a global superpower in a number of areas of finance, that is not true of its stock market.

Lacking the megacap tech stocks that dominate in the US and China, the FTSE 100 is now trading at one of the widest price-to-earnings discounts to the S&P 500 for 15 years. In the past five years, the UK has delivered the worst returns of any major European, Asian or North American competitor, according to FactSet data on MSCI indices.

The face of Airbnb’s Brian Chesky was beamed into Times Square to mark the company’s IPO © Bloomberg
Matthew Moulding, chief executive of The Hut Group, said that listing in the US ‘felt like the wrong thing to do’ © Jon Super/FT

The US offers bigger pools of capital and the prospect of higher valuations. It also tolerates premium voting rights for entrepreneurs such as Mr Chesky. In the UK, insisting on enhanced power for original investors at the expense of regular shareholders — as Hut has — bars companies from FTSE indices and the tracker funds that follow them.

“It goes without saying that the US is the biggest capital market by a country mile,” said Hut founder Matthew Moulding. “If valuation is your driver then it’s difficult to compete with.”

In the end, though, Mr Moulding decided that a US listing “felt like the wrong thing to do on a personal level”. Hut’s London IPO was 15 times oversubscribed and Mr Moulding said he was made to feel welcome by London exchange executives. 

Recognising that other entrepreneurs will choose differently, Mr Moulding is encouraging reforms to help London compete. UK ministers are reviewing the listing regime, with an eye to attracting new companies just as other financial capitals look to exploit the UK’s departure from the EU.

Long seen as the home for banks, insurers, oil companies and miners, London needs to reflect “an increasing shift towards fast-growth technology, ecommerce and science companies”, according to the government’s consultation.

London’s IPO market has been dominated by financial companies

Shrinking markets

New listings are badly needed. The UK equity markets have been shrinking faster than other European exchanges, according to a report last month by consultancy Oxera. The number of listed companies has fallen by a fifth since 2012.

Mark Dickenson, co-head of corporate broking at HSBC, said the “de-equitisation” threat appeared to be picking up again, given a wave of take-private offers for UK businesses. There have been 14 in just over a month.

Mr Dickenson’s concern “has always been about the ability of the London market to replenish”, he said. “‘Classic’ British businesses are being taken off the market but a balancing positive is the large pipeline of IPOs coming to the UK market in 2021.”

Ross Mitchinson, co-chief executive at Numis Securities, agreed. “There are a lot fewer companies listed today than 10 years ago but that trend might start to reverse,” he said, adding that the pipeline was filled with “digitally enabled, higher growth companies where the public markets are willing to pay multiples that reflect those good growth prospects.”

Companies seeking a public listing next year include shoe maker Doc Martens, card company Moonpig, and Deliveroo, the online delivery firm.

The FTSE 100’s lack of tech constituents has held the index back

“The absence of British technology companies on the London Stock Exchange makes it look like a heart patient with severe chest pains — it’s under real threat but it’s not too late,” said tech entrepreneur Mike Lynch, an investor in Darktrace, a cyber security company that is lined up as one of the cornerstone listings of next year. 

Charlie Walker, head of primary markets at the London Stock Exchange, said Hut had “changed the debate” over whether large tech companies would want to float in the UK.

Other executives fear London is too complacent. “I have more contacts in the White House than I do in Number 10,” said Ali Parsa, founder of Babylon Health. “They are asking, ‘how can we make the US a more attractive place?’”

“The depth of the capital market is so much more in the US — it’s significantly deeper across all structures,” he added. “Between New York and Asia, London is being squeezed.” 

City financiers said that the test will be whether the UK can hold on to large London-based international tech businesses that could look to list, such as fintech companies Revolut and TransferWise, and Babylon Health, a digital health company.

Even that is not the end of the story. Tech companies that were founded, grew and sometimes listed in the UK are always vulnerable to deep-pocketed foreign acquirers.

“This is a long-term problem,” said Mr Lynch. “We were worried about Misys and others, Deepmind and Magic Pony being sold. It’s all one way. And with the sale of companies like Arm Holdings [to US chip company Nvidia], it’s an incredible amount of power we have given up.”

Mr Lynch was involved with one such deal, the $11bn sale of UK-based Autonomy to Hewlett-Packard in 2011. Autonomy, a software company that Mr Lynch had founded and ran, later unravelled and the US Department of Justice charged him with fraud. He denies the charges.

Future of the City

In a series of articles, the FT examines how London’s financial centre will fare in the decades ahead as Brexit negotiations reach their climax

‘Crunch time for City investors’

The more realistic near-term challenge may be to stay on top in Europe after the UK definitively breaks with the EU. “The UK is the premium listing venue in Europe and needs to fight to stay there in face of the competition from mainland Europe,” said Tom Johnson, head of equity capital markets at Barclays.

Without Brexit — and if a proposed merger between the LSE and Deutsche Börse had not been blocked by EU competition authorities — London could have cemented its position at the heart of the capital markets union.

Still, with its access to capital, talent pool and infrastructure, many in the City are confident that London can continue to see off smaller regional rivals.

Brokers are also confident that the London market passed a major test during the pandemic: raising close to £40bn for more than 400 businesses seeking emergency funds.

The London Stock Exchange, on Paternoster Square in the City of London © Charlie Bibby/FT

Trevor Green, head of UK institutional funds at asset manager Aviva Investors, said that this year had been a “crunch time for City investors . . . in virtually every case they have delivered for companies”. He added: “Post-Covid, companies will want to raise equity to fund expansion and M&A. So being public helps in good and bad times.”

London also has an advantage in its emphasis on strong corporate governance, say brokers. There have been prominent exceptions, notably former FTSE 100 company NMC Health, which collapsed into administration in April amid a suspected fraud. With the focus on larger companies, the AIM and FTSE 250 markets are sometimes criticised for falling under the radar.

Line chart of IPO volumes by deal value ($bn) showing London lags leading exchanges for new listings

But if London’s calling card is to be the gold standard in corporate and environmental standards, that is off-putting to a large number of companies who want looser rules.

In its report, Oxera said the regulatory burden was a significant disincentive for businesses to float and maintain a listing in the UK.

Barclays’ Mr Johnson said that listing rules have not changed enough over the past four decades: “The people who buy into IPOs are global. The rules do not reflect that.”

The UK listing review is looking at areas to boost London, including relaxing free-float requirements and the sorts of dual-class share structures that many tech entrepreneurs prefer.

“This is an opportunity to create a more enterprise-friendly place — the Delaware of the world,” said Mr Parsa, pointing to the US state’s legal regime that has made it attractive to businesses. “[London] needs to go further, to make it easier, more progressive and more entrepreneurial.”



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Electric vehicle Spacs: Lordstown hits its city limits

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If Lordstown was one of its own electric pick-up trucks, it would have conked out a couple of feet from the charging point. The US group has warned it could fail as a business, running out of cash before even starting commercial production.

Lordstown only listed via a $1.6bn Spac takeover last October. The wheels are coming off fast. That confirms the weakness of the business models of many electric vehicle companies. US markets exuberantly chose to overlook these when the groups listed, excited by the overblown forecasts permitted once a company lists via a takeover by a special purpose acquisition vehicle.

A two-thirds collapse in Lordstown’s shares since February is further validation for Hindenburg Research, which last year took a successful swipe at electric freight truckmaker Nikola. The short seller questioned Lordstown’s sales figures in March. Last month, the company said production of its $52,500 Endurance pick-up truck this year would be “at best” just half prior expectations of 2,200 units.

At least 18 electric vehicle and battery companies went public via Spac deals from the start of 2020, raising a combined $6.6bn from investors, according to Refinitiv. Few of these companies generate significant revenues. Many of them have missed targets.

Shares in Canoo are more than 50 per cent below a December peak after ditching many of its goals. XL Fleet has lost even more of its value after it abandoned guidance for 2021 revenue.

Traditional automakers have rebounded. General Motors shares are up by a half since the start of the year, for example.

The Spac listing process is partly to blame for over-promising by EV makers. It enabled them to publish very optimistic financial projections, compared to what is permitted in a traditional IPO.

Investment often involves backing what sceptics see as a long shot. Tesla took years to hit production targets and turn a profit. The added problem for investors now is that EV production has become a crowded field. Heavy research is required to identify a hot prospect among the no hopers. Extra scepticism applies to businesses listed via a Spac.

The Lex team is interested in hearing more from readers. Please tell us what you think of Lordstown and other EV Spacs in the comments section below.



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Shares in group linked to China’s Three Gorges Dam surge on debut

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China Three Gorges Renewables Group’s stock surged by 44 per cent on its debut after the company raised $3.6bn in China’s largest initial public offering of 2021.

Shares in the renewable energy arm of China Three Gorges Corp, the state-owned company that lends its name to the hydropower dam on the Yangtze river, shot up the maximum daily amount permitted by the Shanghai stock exchange on Thursday.

The group raised Rmb22.7bn ($3.6bn) in its IPO, the largest equity debut in the country since a $7.6bn share sale by China’s biggest chipmaker, Semiconductor Manufacturing International Corporation, last July. The first day jump pushed the company’s market capitalisation to $17.1bn, according to Bloomberg.

The day one pop for China Three Gorges Renewables, which also has interests in wind power, came as China faces a sharp rise in the cost of coal-fired power.

The move reflected strong appetite from Chinese investors for green energy assets as Beijing seeks to make wind a far greater contributor to the country’s electricity output, said Bruce Pang, head of research for investment bank China Renaissance.

“It’s not just a trend in China — it’s a trend across the world,” Pang said.

Demand for shares in the IPO outstripped supply 78 times, according to the company.

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The group will use part of the share sale proceeds to cover almost half the cost of seven offshore wind turbine projects, as it and other renewables companies rush to complete infrastructure before government subsidies expire at the end of the year.

“We anticipate China Three Gorges will strive to finish the projects this year in order to receive the subsidies,” said Apple Li, a credit analyst at S&P Global Ratings.

The credit rating agency said this week that the IPO would provide a significant injection to the balance sheet of parent group China Three Gorges as the subsidiary pursues an “ambitious non-hydro renewables development plan” over the next few years.

China Three Gorges Renewables on Tuesday launched its first floating offshore wind power platform off the coast of Zhejiang province in south-eastern China. The company said the platform could deliver “green and clean energy for 30,000 households a year”.

Unlike fixed wind turbines, which can only operate in shallow waters, floating turbines can generate electricity further offshore, harnessing the power of stronger ocean winds. 

In September, China committed to achieving carbon neutrality by 2060, but its industry-fuelled recovery from the Covid-19 pandemic has put pressure on its environmental ambitions. In 2020, it produced record amounts of steel and increased approvals for new coal plants.

Research last year led by Wang Muyi, an analyst at UK think-tank Ember, found that new wind, hydro, solar and nuclear energy investments could not keep up with a sharp rise in electricity use in China between May and October.

The country is also suffering from a shortage of coal as industrial activity booms, pushing up prices. Last month, a state council meeting chaired by Premier Li Keqiang emphasised the need to further tap China’s “rich coal resources”, but added that the capacity of wind, solar, nuclear and hydropower would be increased to ensure energy supply this summer.

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French music group Believe stumbles on market debut

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Shares in music group Believe, which has set out to create a novel music label for the streaming era, fell more than 17 per cent on its first day of trading, in what is likely to be a blow for the French market as it tries to recover from pandemic volatility.

Believe, whose brands include New-York based platform TuneCore and its own family of labels, reached a valuation of €1.53bn as its shares closed at €16 on Thursday, down from the offer price of €19.50.

The flotation marks the first technology listing on the Euronext Paris bourse since 2014, when online payments group Worldline went public, and is among roughly 30 flotations in the pipeline of the Paris market.

Believe had already priced its initial public offering at the bottom of its scaled-back price range, of between €19.50 and €22.50 a share, which would have given the group a market value of €1.9bn to €2.1bn.

The disappointing response to the listing is a setback for the Paris market, which is trying to establish itself as a location for IPOs and foster the growth of tech companies. The fact Believe is in a fast-growing sector that is popular among investors is likely to add salt to the wound. 

The slip in Believe’s valuation on its debut follows a weak run for tech flotations this year after Deliveroo’s shares fell 26 per cent on the company’s first day of trading in March, wiping almost £2bn from its opening £7.6bn market capitalisation.

Commodities broker Marex Spectron and Parts Holding Europe, a French distributor of car parts, pulled their planned IPOs this month because of turbulent market conditions.

Other French IPOs lined up for this year include OVH, a cloud computing provider, and Aramis, the online seller of second-hand cars that is a unit of carmaker Stellantis.

New investors in Believe include French mutual fund Fonds Stratégique de Participations and Sycomore Asset Management, which specialises in responsible investment.

Believe has been valued at a multiple of roughly half that of other music majors such as Warner Music Group and Universal on an enterprise value-to-sales basis for 2022, according to a person close to the company. It is about two-thirds that of Spotify.

The person said the limited level of free float shares — at only 15 per cent — damped the share price, although they acknowledged Believe’s atypical model also made investors cautious.

“It’s a hot market and a very attractive model, a lot of investors acknowledged that, but in the end [Believe] looks a bit like the underdog in this market,” they said. “There is a wait-and-see attitude from some investors.”

Founded in 2005, Believe has been looking to capitalise on growing enthusiasm for the music sector, which has returned to growth after two decades in decline. 

Believe works with independent musicians and music labels to build popularity via social media and put their work on streaming music platforms. These include newcomers and more established artists, such as French rapper Jul, UK artist La Roux and Lebanese singer Nancy Ajram.

The company, which serves more than 850,000 artists, intends to use the €300m it has raised to expand into new countries, both through organic growth and further acquisitions.



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