The UK’s financial regulator, the Financial Conduct Authority (FCA), has made some important changes to its listing rules, in an attempt to reverse the long-term decline of the London Stock Exchange (LSE) as an attractive place for growing businesses to float.
First, earlier this month the FCA eased the rules on dual-class share-listings. Dual-class shares mean that some classes of shareholders get greater voting rights than others: notable examples of firms with this structure include Alphabet (Google) and Facebook, as well as many other tech firms. This is controversial in the UK because it violates the City’s long tradition of “one share, one vote”, which is seen as important for corporate governance. But they are popular with business owners looking to raise capital by floating, and are permitted by London’s international rivals.
Second, the FCA has also decreased the proportion of its shares that a firm must make available to the public in order to list in London, from 25% to 10%.
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What do the changes mean?
Dual-class shares will now be allowed in the premium segment of the London market. That means that their shares can be included in the main FTSE indices – notably the FTSE 100 and FTSE 250 – which is in turn significant because it means that passive tracker funds will buy their shares, broadening their investor base and increasing liquidity.
The idea is to make it more attractive for the founders of innovative companies to bring their businesses to the market – letting them raise capital and providing an opportunity to UK investors – while also allowing them to keep more control of their businesses and giving them more protection against the threat of hostile takeovers that comes with going public.
Who stands to benefit?
Three distinct groups may gain, said The Economist. First, investors in UK shares, because firms with dual-class shares tend to generate higher returns (an analysis of North American companies between 2007 and 2017 found that dual-class stocks outperformed those with equal voting rights by 4.5% a year – although this may be because many are in the tech sector, which has done very well).
Second, firms with dual class shares that have listed on the LSE’s standard segment in recent years – such as Deliveroo, Oxford Nanopore and Wise – can now get a premium listing.
Third, the overall UK market may benefit from increased global attention if this entices more high-growth, founder-led tech companies to list in the City instead of choosing the US or other rival markets.
What’s the reaction?
Not everyone approves of this idea. For example, Richard Buxton of Jupiter Asset Management reckons it will “reduce investor protection and sow the seeds of scandal and losses”.
But the FCA (and the government, who pushed the review that led to the relaxation) is extremely keen for London to level the playing field with other exchanges that already have dual listings (Amsterdam, Singapore, Hong Kong, the US) and arrest London’s decline.
What’s the scale of that decline?
Over the past 15 years, the LSE’s share of all initial public offerings (IPOs) globally has slumped from 20% to 4%, and since a peak in 2007 the number of companies listed on it has fallen by two-fifths. The total market capitalisation of the 1,964 companies that remain adds up to less than just five US tech giants – Google, Apple, Amazon, Facebook and Microsoft.
Astonishingly, the daily trading on Wall Street in just one stock, Tesla, is worth more than three times the trades on the entire LSE, said Larry Elliott in The Guardian. That’s why the FCA’s relaxation of the rules is so welcome, he argues. It could help persuade fast-growing tech firms looking to list in Europe to choose London, rather than the increasingly favoured Amsterdam exchange. This year the Dutch capital – the world’s oldest stock exchange – overtook London in terms of the average daily value of the shares traded.
What’s a more optimistic take?
The fashionable “self-denigration” of London is being overdone, said Ben Wright in The Daily Telegraph. First, a good part of the LSE’s decline since the mid-2000s is down to the “massive tech boom (bubble?) in the US” and the rise of the Asian economies, especially China. There’s not much anyone could do about that.
Second, the high-water mark for London listings was 2007, when the market was pumped up, pre-financial crisis, with a “flood of bilge”. In truth, the LSE still “punches above its weight” – and the first half of this year saw a giant 467% surge in new IPOs. In the year as a whole (to 4 November), the value of IPOs was $20bn (according to Dealogic) – not far off the total for the previous three years combined.
Meanwhile the huge currency volatility associated with Brexit has settled down, and JPMorgan recently turned bullish on UK equities for the first time since the referendum.
What are the UK market’s prospects?
MoneyWeek has been arguing for some time that the unloved UK stockmarket is a buying opportunity – particularly when it comes to value stocks in a period of higher inflation. Few other indices are as top-heavy with leading oil and mining finance stocks as the FTSE, with six of the world’s biggest, said Jeremy Warner in The Daily Telegraph.
Environmental, social and governance (ESG) concerns have made such stocks unfashionable, but the irony is that transitioning to green energy will require vastly bigger quantities of metals, including copper, nickel, cobalt and lithium. We will need the UK-listed “ageing corporate dinosaurs” – the likes of Glencore, BHP, Anglo American and Rio Tinto – “more than ever if the energy transition required to meet net zero targets is ever to be achieved”.
So don’t write the FTSE off: it “may be about to come back into its own, dragging the wider City with it as a go-to source of green energy fina
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