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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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Why it won’t be Deliveroo that casts a shadow on Darktrace

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You’d have thought a company would need to be brave or foolish to follow in Deliveroo’s smoky wake on to the London market. 

In the event, cyber security company Darktrace appears to be neither. Perhaps because this looks quite a different type of tech offering.

For a start, it has some proper technology behind it. Such is the enthusiasm for showing the UK can attract digital fare that there has been a tendency to pump everything with a website like it’s the next great tech play. 

But Darktrace boasts that it uses machine learning and artificial intelligence in cyber security software. Traditional cyber defence involves building walls against potential attacks, which then must be adapted and replicated as threats evolve and change. Darktrace, founded in Cambridge in 2013, instead deploys its software to understand what a business’s “normal” state is; it says it can then use that to identify and prevent attacks quickly.

In other areas, too, Darktrace should be able to shrug off comparisons. One of the less-discussed concerns around Deliveroo, whose shares fell again Monday to trade about 35 per cent below the offer price, was whether the app with bicycles model really translated into a viable, scalable business beyond its home market. 

Darktrace, in contrast, had more than 4,600 customers in more than 100 countries at the end of last year, up from about 1,600 in 2018. Its software is quick to deploy, meaning it can sell by installing its system and letting it show its worth in a two or three week trial. Subscription contracts mean predictable, recurring revenue.

The cyber company also isn’t as obviously riding high on the back of lockdowns. True, travel restrictions meant lower marketing spending. Normal sales activity would have largely wiped out the adjusted ebitda (earnings before interest, taxes, depreciation and amortisation) profit of $9m for the year to June 2020. (But still, something resembling a profit! In tech!). 

Sales constraints after a pandemic-related hiring freeze will help keep all-important revenue growth to 36-38 per cent this financial year, compared with 45 per cent in 2020, a slowing growth profile that might concern some tech aficionados.

Still, accelerated digital adoption and more remote working should be a boon for cyber companies longer term. And while Darktrace doesn’t have the top-line growth of some US software as a service or cyber peers, like Snowflake or Zscaler, nor is it seeking the same valuation. A mooted $5bn price tag is a sharp step up from its last private valuation of $1.65bn. But it doesn’t look out of line with where some sector companies are trading, according to Public Comps.

Governance is a more complex issue. Darktrace’s five founders, who remain on the management team, aren’t worked up enough about control to demand special treatment. Unlike Deliveroo, there will be no dual-class share structures. 

Its problems are legal rather than structural. Mike Lynch, the former Autonomy boss, was an early investor in Darktrace through his company Invoke Capital. He’s fighting extradition to the US on fraud charges, which he denies, related to the sale of Autonomy to Hewlett-Packard in 2011. His former chief finance officer Sushovan Hussain, also an Darktrace investor, was convicted on similar charges in 2018.

It’s hardly an ideal backdrop to a market debut. And the risk factors in the prospectus make for ugly reading: Darktrace was subpoenaed by the US Justice Department in 2018 and warns it could face potential liability under possible money laundering charges (though it considers successful prosecution a “low risk”)

Lynch left the board of Darktrace in 2018, sufficiently long ago to alleviate concerns about any day to day influence.

But the listing documents suggest a rather tortured attempt to put distance between two things that have been quite closely intertwined. Several Darktrace executives, including its chief executive, were previously employed by Invoke and Autonomy. Lynch was on Darktrace’s advisory council until March 2021, when he moved to a newly-created science & technology council. Invoke has historically provided services to Darktrace, including until recently two employees in its finance operations in Cambridge.

The question is whether potential investors can get comfortable with the reputational headaches — and to focus more on Lynch’s ability to spot homegrown tech potential and less on his continuing legal battles. If they can, Darktrace looks like the kind of tech listing the London market has actually been hoping for.

helen.thomas@ft.com
@helentbiz





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Paper producer Segezha plans Moscow IPO

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Paper producer Segezha is planning an initial public offering on the Moscow exchange, making it the latest in a series of Russian companies looking to tap surging investor demand.

Segezha, which is owned by oligarch Vladimir Yevtushenkov’s Sistema conglomerate, said on Monday that it wanted to raise at least Rbs30bn ($388m) in the IPO. It is seeking a valuation of more than $1.5bn, according to a person familiar with the plans.

The structure of the offering will allow Sistema to retain control of the company.

Russian companies are rushing to go public in response to high demand for emerging market assets and in case geopolitical tensions with the west make it harder to list.

The stimulus-fuelled global stock market boom and a rebound in commodity prices have helped Russia’s market recover quickly from the pandemic.

The Moscow exchange’s benchmark index hit record highs in March and Russian central bank rates remain near an all-time low. Last year, the bourse doubled its number of retail investors to 10m as homebound traders moved away from bank deposits.

In March, discount retailer Fix Price held the largest Russian IPO since the US and EU imposed sanctions against Moscow in 2014. Ecommerce site Ozon, which is co-owned by Sistema, has more than doubled its valuation to about $12.5bn after going public in New York last year.

But the sell-off of the rouble on tensions with the US and the military build-up on the Ukrainian border has underlined that going public remains precarious.

GV Gold, a midsized goldminer whose key shareholders include BlackRock, said late last month it would postpone its IPO — the third time the company has announced a listing then backtracked — because of “elevated levels of market volatility in both the global and Russian capital markets”.

Segezha, which reported nearly $1bn of revenue last year and operating profit of $242m, is the fifth-largest producer of birch plywood in the world and is in the top two for production of heavy duty “multiwall” paper packaging.

Prices for its products have rebounded during the recent economic recovery, while 72 per cent of its revenue comes from export sales in foreign currencies — allowing it to take advantage of the weak rouble at its mostly Russian cost base.

“Bringing Segezha Group to the public markets will crystallize the value of our investment, raise funds that would allow Segezha Group to continue to pursue its investment projects and provide investors with the opportunity to share in the company’s strong growth and benefit from attractive returns,” Sistema chief executive Vladimir Chirakhov said in a statement.

JPMorgan, UBS, and VTB Capital are joint global co-ordinators and joint bookrunners on the IPO. Alfa Capital Markets, Gazprombank, BofA Securities, and Renaissance Capital are joint bookrunners.



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Spac boom under threat as deal funding dries up

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A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter. 

Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.

Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology. 

But people involved in arranging the deals say Pipe investors are overwhelmed by the sheer volume of transactions and put off by rising valuations. 

“There is a lot of indigestion,” said one senior bank executive. “The pendulum has swung to where if you’re in the market with a Pipe right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a Pipe done.”

Spacs raise money when they first list on the stock market but they typically require more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business prospects and its valuation.

There have been 117 deals announced this year, but the growing backlog in Pipes could prove to be a big roadblock for the 497 blank-cheque companies that are still looking for a deal, according to Refinitiv data.

Only about 25 per cent of Spacs listed since 2019 have completed deals so far. Sponsors typically have two years to complete a merger, otherwise they have to return the capital they raised to investors.

Several market participants said the slowdown would lead to a “flight to quality” and put downward pressure on the valuations of acquisition targets, which have skyrocketed in recent months.

Almost all of the executives the Financial Times interviewed said they were seeing Spac deals recut to offer more favourable terms to Pipe investors. One said: “It’s called the buy side for a reason.” 

Because Pipe investments are considered illiquid — the money is tied up at least until the deal closes and there may be a lock-up period after that — investors can usually get favourable terms. They can see the deal before it has been announced to the public and are almost always able to buy in at the Spac listing price of $10.

But earlier this year, Pipe investors were clamouring to get in on Spac deals. The group of institutions that backed Churchill Capital IV’s acquisition of electric carmaker Lucid paid a 50 per cent premium to the Spac listing price to get a stake, almost unheard of at the time.

The recent reversal has Pipe investors negotiating lower valuations for businesses, giving them larger stakes for the same amount of money, and better pricing terms.

“There’s only so much illiquid exposure investors are going to want to take,” said another bank executive who has worked on numerous Spac deals.

The Pipe slowdown is bad news for banks, which are unable to collect on advisory fees if they cannot sell a deal to investors.

It is also starting to affect the pipeline of Spac launches, lawyers and bankers said. In the first seven days of this month, only four blank cheque companies have gone public. That compares with 41 during the first week of March and 28 in February, Refinitiv data shows. 

“Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side,” said Ari Edelman, partner in Reed Smith’s corporate practice.

For those that already went public and are looking for a target, he added, “the hope is this is just a bump in the road. And then ultimately the deal gets done.”



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