It’s game over if the City loses another King

If London can’t attract the next two or three high-profile tech floats, it never will, says Matthew Lynn.

It is the biggest British initial public offering (IPO) of the year. It's an exciting high-tech firm, making a success of one of the world's fastest growing industries.

Over only a few years it has turned itself into a company worth more than £4bn,a sum easily big enough to propel it straight into the FTSE. There's just one snag. The company is King Digital Entertainment, and this week it listed in New York rather than London.

This is worrying because, if the City can't host Britain's new high-tech stars, it will lose its purpose. If it can't attract the next two or three big tech floats, it is going to end up about as interesting as the Paris or Frankfurt markets.

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King may not be a broadly based business, but it's a huge success. Candy Crush Saga is the world's most downloaded app, and one of the most profitable. In February, more than 144 million people played its games. Last year, it made profits of $714m. Revenues grew to $602m in the final quarter, from $22m in the first quarter of 2012.

True, it faces challenges. The bulk of its revenues come from Candy Crush Saga, and the loyalty of teenagers to the latest game they play on their phones is not exactly rock solid. The stock market has been burned before by high-flying app and games firms. Zynga, which makes games for Facebook, was briefly a hit on the market before people started to tire of its hit FarmVille game.

The Finnish games-maker Rovio Entertainment has struggled to come up with anything as popular as Angry Birds. Many of these companies are about as stable as a row of jelly beans in a game of Candy Crush.

But the real question isn't whether it's a good investment only time will tell. It's why it decided to list in New York and not London. This is mainly a British firm, founded in London and Stockholm, backed by London-based venture capitalists. The City should have been its natural home. And it is far from alone.

Markit, the innovative financial data provider, is also planning to list in New York. Wonga, the controversial, but hugely successful payday lender, has been reported to be eyeing a New York listing. So has Mind Candy, another fast-growing games and app designer.

The UK has managed to create and build some flourishing internet firms over the past decade, and London has created a technology hub that is among the best in the world. In Europe, only Finland and Sweden come close, and they are far smaller economies. But the City has not managed to bring these firms on board.

There are some understandable reasons for that. Tech companies like to be among their peers, and the US has a huge lead in internet-based businesses. The fund managers and analysts who understand tech stocks are clustered there, and the story a company has to tell is likely to be better understood, and more favourably listened to. The IPO will probably get a better rating meaning more money for its founders and backers.

The trouble is, a stock market needs the best and fastest-growing companies to remain relevant. London has had a few successful floats in the last few months. But they are firms such as Royal Mail or discount retailer Poundland. Only the online electrical retailer AO World has been an internet play.

The only tech company of note on the London market is the fashion retailer ASOS, and that has chosen to stay on Aim rather than graduate to the main exchange.

The London Stock Exchange has already moved to loosen its rules to make itself more attractive to tech companies. For example, the percentage of shares that have to be issued for firms to qualify has been reduced tech companies often have founders who hang on to the bulk of the stock. But it needs to do more.

The trend over the last decade has been to keep raising the regulatory bar, introducing ever more complex governance requirements for quoted companies.

The intentions behind this trend may be good. The market needs to be kept safe from crooks and fraudsters. But while the likes of Royal Mail and Pets At Home don't mind a lot of box-ticking forms, tech entrepreneurs hate them. There is no point in having a completely safe market that has also got rid of all the exciting, growth businesses.

If the regulations need to be rolled back, then so be it as long as investors know there is a risk, they can take their own chances.

But perhaps what is most needed is a change of mood among the City banks and, most of all, the fund managers. There is still a tendency to dismiss the likes of King as flimsy, of Wonga as exploitative, and Mind Candy as faddish.

But Twitter is a one-product company, and Google has never really made money out of anything except its search engine. Apple has gone in and out of fashion over the years but when the hits started, it became the biggest company in the world.

The banks and fund managers need to embrace the new wave of tech floats. That is where the real profits will come from. One thing is certain. If London can't attract the next two or three technology floats, it won't get any of them.

No one wants to be the only tech company on the market. It will be game over, as they might say over at King's headquarters.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.