What’s behind the FTSE exodus?

In recent months, money has been pouring into the city to pick up listed companies, while there has been a worrying trend that fewer and fewer companies want to list on the London stock market.

UK capital markets have been described as a ‘backwater’ in the years since the 2016 Brexit referendum, with foreign investors averse to the additional risk and headwinds – and potential lack of reward – offered in the wake of the departure of the country from the trade bloc.

While some may just want to point the finger at Brexit, this is not the only problem. The UK stock market has also developed a reputation for being one for more traditional companies, with tech-focused companies opting for the US instead.

One problem is that when valued companies are bought out by private equity, exciting new companies don’t take their place.

Government and city regulators have been looking for ways to capitalize on the trend in efforts to make London a more attractive destination for public companies, but experts warn there are no easy answers.

While not the only barrier to London’s appeal compared to rival markets such as New York or Hong Kong, Brexit has weighed on Britain’s attractiveness as a destination to invest or market a business.

Chief economist and head of research at investment bank Panmure Gordon Simon French said: “Historically, big investors have allocated more to the UK than the economy probably warranted because it had decent returns, an outsized financial sector and a relatively stable currency.

“Since 2016, international investors have not taken a position on whether Brexit is good or bad, but they see that it has created a lot of volatility in the pound and political instability. As a result, they reduced their exposure to the UK.

“If you’re being constructive, you’d say that as the dust settles, political stability improves, some of the costs of Brexit become clearer and some of the fears about Brexit go unrealized, you can start setting the price. impact on UK businesses better.

“But right now it’s more of a trickle than a flood.”

Weak liquidity, heavy regulatory burden and relatively small market capitalizations are also cited as contributing to a significant discount to the valuation of listed UK companies and the cost of raising capital on the stock exchange.

This is evidenced by a 40 percent drop in UK IPOs since the 2008 financial crisis, according to the UK Listing Review, as well as high-profile disapproval from London markets in favor of competitors such as Arm’s.

AJ Bell managing director Kevin Doran said: ‘The loss of Cambridge-based chip designer ARM Holdings to the US market has clearly hit the government and FCA hard.

As the crown jewel of the domestic tech sector, the fact that the company chose the US as its new home when it returned to public markets is a sign of how far the UK has fallen since the company was delisted in 2016.

Like a nightclub bouncer, the London market has historically had a stricter dress code than most when it comes to listing rules, whether in the form of restricting double listings, voting on large trades or requiring more information when raising capital. .’

The relatively small market capitalizations of UK companies make it difficult for large investment funds to allocate to them, which is only compounded by the rapidly consolidating asset management industry.

CEO and founder of business consulting group Trachet, Claire Trachet said: ‘In terms of listing, there is often more potential in the US than in the UK, so if you’re a technology company in Europe [for example]the question will always be whether you should list on your home market or go to the US.’

Lured by the perception of low valuations and a weaker pound, recent private takeover bids include Dechra Pharmaceuticals, John Wood, THG and Hyve Group, while reports suggest Watches of Switzerland is also sparking interest.

The trend has grown in recent years, with a record year 2021 in which private equity completed 863 transactions in the UK, followed by the second most active year ever in 2022, according to KPMG.

And there is little sign of the trend abating, with a report from Bain & Co showing that private equity firms are still left with a record £3.7 trillion in unspent cash.

trachet said: [Private equity] investors are no longer frozen; they know that opportunities will come and are prepared to seize them actively.

“They also know that many of these opportunities will come from companies that are struggling, so acquirers know they’re getting a bargain, which provides a more positive outlook for the business.”

Victoria Scholar, head of investment at Interactive Investor, added: ‘Opportunistic private equity approaches are likely to continue as they look to bet their dry powder on undervalued and cheap assets.

This means that unloved UK assets are likely to continue to attract the attention of deep-pocketed US PE houses.

“The weakness in the pound adds to the UK’s appeal, with the pound’s recovery suggesting PE investors need to act quickly before it’s too late to take advantage of that FX advantage.”

But the acquisitions also represent the fact that many companies believe they will be better positioned for growth using private capital, rather than raising money in public markets.

On Tuesday (May 2), AIM-listed Plant Health Care was the latest company to reveal that it is evaluating its future on the stock market with bosses “frustrated” by the performance of its stock price since listing.

Similarly, Italian entrepreneur Gabriele Cerrone, who launched Okyo Pharma in July 2018, recently said building a biotech company in the UK “is like trying to grow plants in the desert.”

Cerrone explained his decision to delist the share on May 12, saying the volume of shares traded in London is “negligible and does not justify the associated costs.”

The Financial Conduct Authority this week announced plans to reform and streamline listing rules to “attract a wider range of companies, encourage competition and improve investor choice.”

FCA chief executive Nikhil Rathi said: “Our proposed reforms would significantly rebalance regulatory burdens in favor of listed companies and investors willing to set their own risk appetite and conditions.

“While regulation plays an important role, many factors influence a company’s decision to go public or not, so substantive changes will also require a concerted effort from government and industry.”

But Panmure Gordon’s Frenchman, who previously worked in the cabinet as chief of staff to the UK government’s COO, warned there is “no panacea” for improving the attractiveness of a London stock exchange listing.

He said: ‘It’s not that the UK is an expensive place to list, we’re not internationally uncompetitive in that respect. It’s not even a particularly heavy reporting burden.

“But I’ve lost count of the number of recommendations from the Treasury Department or regulatory bodies on corporate governance that apply to ‘all publicly traded companies’.

“If you want to reduce your reporting obligations, there is an incentive to stay private and raise your money in private capital markets.

“That’s a more salient feature of why companies are quite open to the idea of ​​being bought out by private equity and taken private at this point.”