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LSE urges listing rules reform for fast growth companies

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The London Stock Exchange has joined City and business groups in urging the government to overhaul the rules for company listings in the UK in order to attract fast growth companies.

Ministers kicked off a review into the UK’s listing regime led by former EU commissioner Jonathan Hill last November to encourage more companies to float in London. 

An industry consultation for the review closed on Tuesday, and has highlighted a deep split in the City.

On one side, corporate governance advocates want to uphold the gold standard of rules in London with only minimal relaxations to tight listing requirements.

But many City executives are pushing for more fundamental reforms to attract fast growth companies to the UK that might otherwise choose exchanges in the US, Asia or Europe that offer more relaxed regimes.

In its submission the LSE backed easing the rules that apply to its biggest blue-chip stocks, which adhere to its highest standards.

The LSE has urged the government to relax rules that demand start-ups, often owned by a founder or a small number of investors, sell a minimum of 25 per cent of their company in a listing, according to a person involved in the submission. It said this discourages owners who are reluctant to sell too much of their businesses.

The exchange also supported dual class share structures for companies in the top tier of the market, the so-called ‘premium’ segment. These would give certain shareholders greater voting rights than others, albeit with certain safeguards such as imposing time limits or restrictions on what the shares can vote on.

These recommendations will probably put it in conflict with others, such as the Investment Association, which represents the UK investment industry, whose submission is expected to warn against making such fundamental changes.

People close to the association said it would argue against the use of dual class shares in the premium segment, and so uphold the current principle of “one share, one vote”, and only lower free float requirements by a modest amount and for a limited time.

Government officials are open to reforms to help boost London’s position as a place for fast growing, tech-focused companies to be listed now that the UK has left EU rulemaking. 

The bigger initial public offerings are fiercely fought over by different exchanges. London is seen to have become less attractive to the high growth companies that want more flexible rules over their listing, in comparison to the US and Asia where tech firms make up a much higher proportion of the market.

The debate has focused in part on the Hut Group, which floated in September last year and was the largest IPO in London for five years. It managed to only secure a so-called “standard” listing.

Others have also advocated deeper changes to attract tech-focused companies. Innovate Finance, which represents the interests of financial technology groups, warned that without changes “many founder-led businesses feel in time they will be pushed to more flexible listings markets overseas”. 

In a letter to Lord Hill outlining its submission seen by the Financial Times, Charlotte Crosswell, head of Innovate Finance, argued for increased flexibility for dual class shares, changes to the minimum free float, and increased routes to a premium listing.

Without greater freedom to use dual class shares, she said that influential investors and fintech founders may prefer a listing on Nasdaq to London, “in favour of higher valuations and greater protection for personal investment positions”. 

“Against the backdrop of Brexit, we need to recognise that interest in listing in EU markets is also increasing,” she added.

Business groups have also argued that changes are needed. The Institute of Directors said a segment of the premium listing category could be created for innovative high-growth companies. These would then be permitted to undertake IPOs or equity issuance with dual class share structures. 

“The Hill Review must strike a fine balance. On the one hand, the UK must avoid a race to the bottom. Our high standards of governance are a selling point for global investors. On the other, our listing rules framework must keep pace with the times,” said Roger Barker, the IoD’s director of policy.

The CBI also backed relaxing dual class share limits for the premium market — with “appropriate limitations and rules of disclosure” — as part of “a flexible and proportionate regulatory approach to encourage deeper capital markets” in its response to the consultation.

The government has said Lord Hill will give recommendations in “early 2021”.



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Honest Company’s market debut marks a comeback

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When the Honest Company lists on the Nasdaq exchange on Wednesday, it will be the culmination of a long recovery for the baby and beauty products group co-founded and fronted by the actress Jessica Alba.

The company priced its initial public offering on Tuesday at a valuation of $1.4bn, having worked to shake off much of the reputational and financial damage from a series of product lawsuits and recalls.

Honest, founded in 2011, had been valued as high as $1.7bn in 2015 before controversy over some of its claims to be using only natural ingredients in its products. In 2017, the company also recalled baby wipes because it found mould in some packages, and baby powder over concerns it may cause skin or eye infections.

Sales slid and Honest lost its status as a “unicorn”, a private company worth more than $1bn.

“Our rapid growth,” Alba wrote in a confessional passage in the IPO prospectus, “was compromising key business functions.”

Honest has never been profitable, but its revenue rose from $236m in 2019 to $300m in 2020 as the pandemic fuelled a run on cleaning products and other household staples. That took sales back to the level the company last enjoyed in 2016.

Losses narrowed last year to $14m from $31m in 2019.

Honest has previously said it expected to price its offering between $14 and $17 a share. At $16 each, it raised $413m, a majority of which will go to existing investors who are selling some of their stake.

Alba had been inspired to launch the brand after the birth of her first child left her scrambling to find household products she deemed safe to use around her daughter. She pledged to hold the company to an “honest standard of safety and transparency”.

Honest markets its products as natural, boasting that “we ban over 2,500 questionable ingredients”. It is one of many consumer goods makers seeking to tap into buyers’ appetite for household products seen as non-synthetic and sustainable.

The company still flags “health and safety incidents or advertising inaccuracies” as a continued risk factor in its prospectus. In January the brand issued a voluntary recall for one of its bubble baths, out of concerns that it could cause infections.

Ahead of the IPO, the company said two weeks ago that Alba would be stepping down as chair of the board when the company lists, handing the role to James White, former chief executive of Jamba Juice. She will remain the company’s chief creative officer, on a salary of $600,000 a year and, according to the prospectus, key to the company’s future success.

“Jessica Alba is a globally recognised Latina business leader, entrepreneur, advocate, actress and New York Times bestselling author,” it said. “Our brand may . . . depend on the positive image and public popularity of Ms Alba to maintain and increase brand recognition.”

Alba’s 6.1 per cent stake after the IPO was worth about $90m at Tuesday’s offer price.

The 3.8 per cent stake held by chief executive Nick Vlahos was valued at $57m. Vlahos has been steering Honest’s recovery since 2017, when he replaced co-founder and serial entrepreneur Brian Lee.

Honest secured a $200m investment from the consumer-focused private equity group L Catterton in 2018. The group is selling about half of its current 37.1 per cent stake in the offering, enough to recoup that investment, leaving a 17.4 per cent holding worth another $252m.

Morgan Stanley, JPMorgan and Jefferies are leading the offering.



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Oxford Nanopore/IPO: sequencer has Woodford in its DNA

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The stampede of pandemic winners to the stock market inspires wariness. Oxford Nanopore, which plans to go public this year, is one such beneficiary. The spinout from Oxford university is responsible for a fifth of the international sequencing that tracked coronavirus mutations.

That has drawn attention to a company with a lot of potential in a wide range of applications. An initial public offering could value it at significantly more than the £2.5bn price tag from a private funding round on Tuesday.

Started in 2005, Oxford Nanopore has benefited from the support of long-term shareholders. However, the backing of Neil Woodford is a complicating factor. The funds business of the prominent UK asset manager folded in 2019 following dire performance.

A successful float would benefit Schroder UK Public Private, the “patient capital” investment trust Woodford formerly ran. But there will be anger from former investors in his defunct income fund. Its 6 per cent stake in Oxford Nanopore was bought by Nasdaq-listed Acacia Research, which put a valuation of just $111m on it in its latest accounts. Woodford, who announced a controversial plan to restart his career in February, is working with Acacia as an adviser.

Oxford Nanopore’s decision to join the London market rather than Nasdaq will also hamper the valuation. But assume, as Jefferies does, that sales more than doubled to £115m in 2020. Even if Oxford Nanopore was valued at half the multiple of peers like US Pacific Biosciences, it would be worth £3.6bn.

That is less than a tenth of the size of San Diego’s Illumina, the global leader. Oxford Nanopore argues its sequencing technology — which monitors changes to an electrical current as nucleic acids are passed through a tiny hole — beats traditional camera-based approaches. Sequencing can be done quickly and cheaply by miniaturised devices. Accuracy has been a weak point, but is improving.

Investors should focus on the science, setting aside market froth and the Woodford connection. At the right price, Oxford Nanopore’s plan to facilitate the analysis of “anything, by anyone, anywhere” would be worth investing in.

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Trustly postpones $9bn flotation after regulator flags concerns

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Trustly has postponed its proposed $9bn stock market flotation after Swedish regulators raised concerns about the payment company’s lack of due diligence on its end customers.

The planned initial public offering was due to be one of the biggest by a fintech company in Europe this year and was set to take place this quarter but had now been postponed indefinitely, Trustly said on Monday.

Sweden’s Financial Supervisory Authority told Trustly in April that while it had until now conducted due diligence only on the merchants for which it provided payment services, it should now also check on some end-customers.

Johan Tjarnberg, Trustly’s chair, said the company needed to resolve all the questions from the regulator before pursuing an IPO. A listing remained “our ambition” but “there is today no timeplan set” for it, he added.

Trustly has pitched itself as an alternative to buy-now, pay-later companies such as Klarna, valued at $31bn, that rely on the card networks of Visa and Mastercard for payments. Trustly offers payments directly from the bank accounts of customers to those of merchants. It claims its fees are lower than fintech companies that use card networks because it cuts out the middlemen.

As well as ecommerce, Trustly is also known in the payments industry for having a large presence in the higher-risk betting sector. Rivals have questioned the company’s activities outside of online retail. “They are in riskier areas that many payment groups have just refused to go into,” said one European fintech executive.

Oscar Berglund, Trustly’s chief executive, said betting was one of five different merchants it dealt with. “As a matter of policy, we only serve licensed operators, and we also have clear exclusion criteria as regards other verticals,” he added.

Trustly flagged in its annual report in March that the Swedish regulator was conducting a supervisory review into its compliance with money laundering and terrorism financing prevention rules.

Asked by the Financial Times about the review, Berglund downplayed its significance, saying: “It’s not the first time they review us. It [won’t be] the last time.” He conceded that betting companies were “a higher-risk kind of merchant” and added “we need to do closer checks on them, which we do”.

Swedish regulators clearly have a different view, arguing that Trustly needs to run checks on the people who use its payments services in such cases, not just the betting companies themselves.

Tjarnberg said Trustly would “engage in a constructive dialogue” with regulators. Berglund said at the end of April that the regulator could “adjust its observations” based on Trustly’s response.

Trustly also disclosed first-quarter results on Monday, in which its revenues increased 46 per cent compared with the same period last year to SKr632m ($75m). Underlying earnings before interest, tax, depreciation and amortisation rose 31 per cent to SKr275m.

Growth was particularly strong in the US, where revenues increased 609 per cent compared with a year earlier and now account for a quarter of the group’s total revenue.



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