The LSE used to be the beating heart of global equity markets – majority of new global issuers wanted to list in London because of the ease of access to global investors. A “big-bang” deregulation which launched in 1986 turbocharged a transformation which lasted till 2000. This deregulation drove privatizations, cross border listing and expanding Alternative Investment Market (AIM), which ultimately accelerated the growth of the LSE. Besides being able to tap a deep pool of institutional capital, issuers poured into the LSE to benefit from the city’s legal and governance standards. During its peak years, the LSE recorded sturdy IPO activities and increased secondary fundraising. London became Europe’s largest equity venue, particularly for non-U.S. issuers who were concerned about U.S. liability and disclosure burdens associated with listing in America. These advantages of listing on the LSE provided a solid opportunity for global issuers who could not get comparable liquidity or regulatory credibility in their local stock exchange markets. In the mid-2010s, London still drew marquee names and remained the default venue for mining, energy and international finance companies, with AIM playing host to hundreds of growth companies. The LSE competed at close range with the NYSE despite the emergence of New York’s tech boom. The LSE advantages were in sectors where dividend-yielding equities and global exposure mattered. In other words, issuers who could guarantee stable dividend payment to investors found it easy to list on the LSE. Relative to European markets, the LSE was preferred from the lens of broad analyst coverage and the position of London as a global financial hub.
The era of LSE as a major market for equity issuances has thinned since 2010. It got worse in 2020 after the pandemic with frequent recall of potential IPOs. The causes were structural; not cyclical. For context, UK pensions started retreating from domestic equities towards fixed income and liability-driven strategies, diminishing a natural pool of long-term demand. Additionally, listing on the LSE came with the so-called “London Discount”. This discount represented the weak confidence of investors in the U.K. economy, prompting cheaper valuations of LSE-listed stocks, particularly those listed in growth and tech. Furthermore, recent bout of taxes on stock market trading (like the stamp duty on share transactions) has compelled investors and issuers to prefer the NYSE to the LSE. There is also the impact of Brexit, which dented investor sentiments in the future of the U.K. economy and its capital market. From a perspective of demand, global investors have tilted to preferring stocks with higher multiples, deeper liquidity and aggressive growth potentials, which are more prevalent on the NYSE than the LSE.
Evidences supporting the preference for U.S. listing are ominous. For instance, ARM, the cambridge-based chip designer, chose Nasdaq in 2023 for its IPO after intense lobbying to bring it home. This was in large part because of the high valuation multiples which U.S. investors were prepared to ascribe to tech-related stocks. Another firm, CRH, shifted its primary listing to the NYSE to reflect its North American revenue base and broaden its investor composition. Revolut’s experience is more recent. Its leadership publicly suggested that U.S. valuation for fintech makes the NYSE more attractive than London. Who would blame them? American investors like anything tech. For Shein, the Chinese fashion giant, the firm has oscillated its listing interest between the U.S. and U.K. While Shein’s first interest was the U.K. implying the presence of some pull factors, the firm’s commentary on U.S. market depth and consumer brand recognition were upsides for the NYSE while the stiff regulations in the U.K. were downsides for the LSE.
One of the key debates on the slower pace of IPOs on the LSE is the detraction of the LSE from its parent. Essentially, the call has been to separate both structure. The parent company, the London Stock Exchange Group (LSEG) has evolved into a diversified data, analytics and indices powerhouse, bolstered by the acquisition of Refinitiv. The acquisition paved the way for a world-class information franchise with enviable recurring revenue and global footprint. However, global issuers and bankers opine that the LSEG is better suited for selling data and analytics solutions instead of cultivating IPO pipelines, enhancing issuer service and campaigning for reforms which could improve listing outcomes. Therefore, it is now debated whether it makes more sense to strop the LSEG from the LSE when diagnosing the decline in listing. It is also argued that the outstanding performance of the LSEG in providing data has led to resource allocation in favour of the LSEG as opposed to the LSE. Thus, the central recommendation is that the management of the LSEG and LSE be split into two independent bodies.
Restoring the LSE’s fading glory requires concerted supply and demand-side policies. On the demand side, institutional investors must come back to the table and this can be done by reorienting these investors about the essentiality of domestic equities in their portfolio. Also, a minimum fixed % exposure to requisites. By stoking more demand for UK stocks, investors should be made aware that this would drive capital inflow to UK growth companies. Overbearing taxes on capital market transactions should be reviewed to prevent further contraction of interest in stocks. On market structure, London should deploy stronger liquidity incentives for designated market makers at IPOs, reduce settlement friction and streamline index inclusion pathways so that successful new listings can more quickly access passive flows. Bringing back research for small and mid-sized companies, by changing certain rules or helping independent researchers, could give important information needed to help them list on the bourse. Reviving issuers’ appetite to list on the LSE also requires simplifying listing requirements, which has been a major concern for lost listing opportunities.
We note that stalling the implementation of these recommendations could wield several outcomes. First, London could become a hub for secondary trading, with strong ETF, debt, and derivative markets but a declining primary equity market as blue chips move listing abroad. Another outcome is that LSEG might succeed as a data and post-trade business while new equity listings decline, eroding the city’s reputation for capital formation and shifting IPOs mainly to the U.S. A third scenario is that London focus on listing of international stocks and Global Depository Receipts (GDRs) for issuers avoiding U.S. regulations, but losing ground in high-growth sectors, widening the valuation gap and reducing domestic equity ownership.
Written by Michael Ogunremi
Image Credit – Photo by Leticia Golubov: https://www.pexels.com/photo/the-gherkin-at-night-and-london-street-27489783/
