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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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Should the UK change its listing rules to attract more overseas companies?

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Yes — Free float and dual-class share structures need reform

Late last year, the UK launched a review of its rules for stock exchange listings as part of a broader effort to strengthen London’s “position as a leading global financial centre”, writes Lorna Tilbian.

Brexit and the pandemic make it critical for the UK to seize this chance to reshape our rule book. The listings market must be made more attractive to fast-growing tech and other new economy companies that will create the growth and jobs of the future. 

This would put Britain at the forefront of the fourth industrial revolution, as it was at the first, and cement London’s reputation as a world-class market with high standards of governance, shareholder rights and transparency. 

Here are two key areas where change is needed to make the UK more competitive: the rules on free float and dual-class share structures. The UK requires listed companies to have at least 25 per cent of their shares in public hands, as opposed to insiders. US rules do not preclude free floats as low as 10 per cent. Similarly, the US and Hong Kong allow companies to list with multiple classes of shares with different voting rights, while the UK does not.

These firm rules are major obstacles to the London Stock Exchange’s efforts to attract fast-growth businesses. Many founders worry about retaining control of their businesses after an initial public offering and early investors are concerned the free float requirements will force them to sell shares earlier — and cheaper — than they would like.

Most founders want the higher valuation and liquidity that are seen to be part of a “premium” listing, as well as membership in the FTSE indices. So, it would do little to create another type of listing with looser rules. The dual-class share issue is also a problem for founders who want enhanced voting rights to help guard against a hostile takeover.

The UK has an interest in strengthening founders’ rights as well, as it would make listed companies less vulnerable to acquisition early in life by a foreign company. Such purchases impoverish the British ecosystem of tech companies and listed companies more broadly. Not all dual-class shareholder systems are alike, and a balanced conversation about types and limits is welcome.

Many UK founders would like a home listing, to be famous here and give back, but they feel pulled to the US, where tech founders are feted on Wall Street, Main Street and in the media and can obtain higher valuations.

Indeed, valuation is London’s overarching challenge. For most companies contemplating an IPO, the major goal is to achieve the highest price, to reward employees and investors, and facilitate future growth. Until the UK has a critical mass of businesses with attractive valuations, we will need rules that actively draw them here.

We need an ecosystem and potentially new FTSE sectors to attract entrepreneurs, bankers, analysts and investors. The media sector was created after the early 1990s recession by merging agencies with broadcasting and publishing, plucked out of other sectors. This helped spawn a dozen FTSE 100 media companies by 2000, including Sky and WPP.

The debate over listing rules is often framed as high regulation versus cutting rules to win IPOs, but it is really about striking the right balance. The dilution of shareholder rights should be minimised, but anything that deters listings will be a pyrrhic victory.

UK public markets must embrace founder-led businesses and celebrate fast-growth companies that represent jobs and the future of an independent Britain. The US’s Nasdaq must not remain the natural destination for aspirational tech companies and London must stave off increasing competition from European exchanges.

If we miss this opportunity, the UK’s pipeline of growth companies could go to the US or be sold to private equity or competitors. London already has a time and language advantage; we must create a regulatory advantage to attract these IPOs before it is too late.

The writer chairs Dowgate Capital

No — Britain’s high standards must not be sacrificed

Re-energising the UK’s capital markets has never been more important, but it requires more than reassessing the listing rules, writes Chris Cummings. We need a wider look at the capital market ecosystem for fast-growing companies. Only then will we boost our reputation as an attractive centre for companies to list and investors to do business.

The Covid-19 pandemic has highlighted the importance of public markets and the role investment can play in delivering benefits for the economy, society, and the planet. By attracting high-growth companies of the future to list, a healthy public market which embraces innovation will deliver the long-term returns that savers and investment managers need. We want these companies to list and locate their operations here, bringing new jobs and much-needed tax revenue.

But success is not just about increasing the number of initial public offerings. We must be confident in the quality of companies looking to list and their ability to provide long-term value. The UK’s ambition to be a global leader in stewardship and sustainability must also be reflected in the listing requirements and they must give shareholders sufficient ability to hold companies to account. If we make any changes to attract high-growth, innovative companies, we must keep the rules sufficiently robust to protect savers’ money.

For the “premium” segment, which has the highest standards, this is particularly important, as tracker funds must buy shares in these companies to replicate the FTSE index. With more than £250bn invested in these funds, it is paramount that investors have the powers they need to oversee these companies and confidence in their governance.

A 25 per cent free float requirement protects investors by guaranteeing liquidity and ensuring there are enough minority shareholders to raise concerns with the management. There is an argument for reducing the free float if the company’s market capitalisation is sufficiently large, but such flexibility would need to include voting safeguards for independent shareholders.

The current listing regime offers flexibility for companies that want multiple classes of shareholders in the “standard” segment, but it is perceived to be a poor relation. By rebranding it, we can increase its appeal to entrepreneurs. Founders could maintain voting control, while at the same time using a standard listing as a springboard to a premium listing.

Attracting more companies to this segment and making it easier for groups to move between segments will increase the UK’s appeal as a place to list. More work also needs to be done to promote the flexibility offered by the current system and categories — done well this can be a selling point for the UK. There should be a proactive unit which brings resources from within government and the regulators to help achieve this.

The pandemic has also highlighted areas where the UK should look to reduce more onerous listing requirements. Between March and the end of November, 73 members of the FTSE All-Share index raised more than £22bn of additional capital using mainly trading updates rather than full prospectuses. This suggests that prospectus and record requirements can and should be cut, making it easier for companies to list and raise additional capital.

There are also lessons to be learnt from wider trends. The number of IPOs globally dropped in the 2010s as more companies opted to stay private and is only beginning to recover. For public markets to flourish, we need to tailor our listing regime to support companies in different phases of growth, restructuring and into maturity.

The listing rules are not the only barrier on companies’ appetite to list in the UK. Companies also consider the wider ecosystem. The UK needs to grow the pool of specialist tech-focused lawyers and advisers who can support the high-growth companies we wish to attract.

The listing review is important, but we need to consider it in the context of much wider issues and not sacrifice the high standards for which the UK is known. The prize — wider access to capital for UK and international businesses, more high-growth companies operating in the UK and robust governance delivering long-term returns for British savers and the wider economy — is one we can all agree is worth striving for.

The writer is chief executive of the Investment Association



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Vegan milk maker Oatly targets $10bn IPO

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Oatly, the Blackstone-backed Swedish vegan milk maker, is eyeing a valuation as high as $10bn in a US listing that would tap into both the IPO boom and consumers’ growing thirst for plant-based alternatives to animal products.

The Malmo-based group said on Tuesday that it had submitted a confidential filing for an initial public offering with the US Securities and Exchange Commission, less than a year after a funding round led by Blackstone also brought in Oprah Winfrey and Jay-Z’s Roc Nation company as investors, valuing Oatly at about $2bn.

Two people briefed on the situation said it was looking at a New York listing with a valuation as high as $10bn. Oatly declined to comment.

The offering is expected to take place following the SEC’s review, subject to market conditions, Oatly said.

The main aim of the float would be to raise money to fund growth, said one of the people, but a listing would offer a chance to cash in for investors who range from Blackstone to the Hollywood actor Natalie Portman and the Belgian family investment group Verlinvest, which bought a majority stake in Oatly five years ago.

Oatly had revenues of about $200m in 2019, roughly double the previous year, and had aimed to double sales again in 2020, though no figures have been made public.

The oat milk specialist, which also makes plant-based ice cream and yoghurt, has tapped into growing demand for plant-based equivalents to dairy, fuelled by environmental concerns — especially around emissions from cattle — and a perception of such foods as healthy.

In the US, total retail sales of non-dairy milks rose 23 per cent to an estimated $2.2bn in 2020, according to market researchers SPINS.

That was dominated by almond milk, which accounted for $1.3bn. But consumers have embraced a growing range of plant-based dairy ingredients including seeds, legumes, pulses, grains and nuts. Sales of oat-based dairy products tripled in the US in 2020, to $288m, overtaking soyamilk as the number two plant-based milk. 

Oatly’s signature oat milk was especially successful ahead of the pandemic with a “barista edition” used in cafés that produces a froth similar to that of cows’ milk for cappuccinos and macchiatos. 

Rival Chobani, a New York-based company that built its reputation on plant-based yoghurts, has also reportedly been considering a listing, while Oatly competes with companies such as France’s Danone, which has branched out from a history in dairy to produce plant-based alternatives such as the Alpro brand.

Oatly faced a customer backlash on social media over its decision to accept funding from Blackstone last year, with consumers criticising the private equity group’s sustainability credentials and a history of support for Donald Trump by its chief executive Stephen Schwarzman.

Oatly said at the time: “Our bet is that when Blackstone’s investment in our oat-based sustainability movement brings them larger returns than they would have been able to get elsewhere . . . a powerful message will be sent to the global private equity markets, one written in the only language our critics claim they will listen to: profit.”

Companies have been rushing to list in recent months and take advantage of an equity market rally that has bolstered IPOs such as that of Blackstone-backed dating app Bumble, which raised $2.15bn in a Nasdaq listing this month, and Israeli mobile games company Playtika, which raised $2.2bn in January.



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Dumped WeWork co-founder could reap $500m from Spac deal

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Adam Neumann could reap almost $500m in cash from his holdings in WeWork and emerge with a stake in a public company, less than 18 months after the high-profile failure of its initial public offering cost him his job as chief executive. 

SoftBank is in advanced talks with WeWork’s co-founder and other shareholders to settle a bitter legal battle stemming from the Japanese group’s October 2019 rescue of the office group, which was needed to help it avert bankruptcy in the wake of the IPO’s collapse, people familiar with the negotiations said. 

Cleaning up the litigation brought by Neumann and a special committee of the group’s independent directors would clear the path for WeWork to be bought by a special purpose acquisition company, giving it the public listing it tried and failed to get in 2019. 

People familiar with the matter said BowX Acquisition, a blank cheque vehicle that raised $420m in an IPO in August, had approached SoftBank, WeWork’s largest shareholder, about a deal that could value WeWork at about $10bn.


$47bn


The price tag SoftBank put on WeWork in its last private funding round before the failed IPO

Talks between the two groups are continuing and a deal could be reached in the weeks ahead, although the negotiations could still fall apart. Resolving the legal fight with Neumann and others has been seen as critical to completing a merger with BowX, given the new public company must attract investors to its shares.

The mooted valuation would be well below the $47bn price tag SoftBank put on the company in its last private funding round before the failed IPO, which Neumann and his Wall Street bankers once hoped would match or eclipse that level. 

But it would represent an unexpected rebound in Neumann’s fortunes, an endorsement of a business model that appeared imperilled as the Covid-19 pandemic emptied offices and another indication of how the Spac boom has transformed capital markets. 

SoftBank is said to have approached Neumann and the special committee within the past two weeks with a proposal to settle their dispute over a $3bn tender offer that formed part of its October 2019 rescue. The Japanese group had pulled out of the agreement to buy the stock from Neumann and other investors, saying conditions in the deal had not been met.

The opposing sides were due to face off in court next week over the tender offer after an earlier trial gave the special committee and Neumann standing to bring their case against SoftBank.

The settlement under discussion would result in SoftBank paying $1.5bn — half the sum under dispute — to Neumann and other investors including Benchmark Capital. Neumann would receive about $480m for 25 per cent of his holdings, rather than double that for the 50 per cent he could have tendered. He would also retain three-quarters of his current holdings in the public company. 

WeWork has retrenched staff and exited more than 100 open and planned locations since its fortunes shifted drastically last year. Under the leadership of chief executive Sandeep Mathrani, the company has dramatically reduced costs, although it continues to lose money.

The talks are continuing and the exact sum Neumann and others receive could change.

BowX is led by Vivek Ranadivé and Murray Rode, two former executives of Tibco Software and backed by Bow Capital, the venture capital fund Ranadivé founded with support from the University of California. In listing documents last year, it said it intended to scout for telecoms, media and technology companies. 

Ranadivé also owns the Sacramento Kings basketball team.

The Wall Street Journal earlier reported on the settlement talks.



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