UK Edition
While Blue Prism is not a household name on the London Stock Exchange (LSE), it is exactly the type of company Chancellor Rishi Sunak wants to keep on the UK market post-Brexit.
The Warrington-based group is a fast growing manufacturer of automation software with a market value of £1.5bn. However, Jason Kingdon, its chief executive, is weighing plans to follow the well-trodden path of UK technology companies and list in the US in order to scale up.
“At a core level, there’s just more people, more money and more specialisation in the US, which means… you achieve greater valuations,” Kingdon says.
He views London as a much more “generalist” market. “You don’t have the same amount of choice in terms of the number of tech firms you can invest in so [as an investor] you can’t live your life just in that sector.”
Known as a comfortable home for banks, miners and oil companies, the LSE currently lacks the high-growth technology firms that have propelled bourses in New York and China to dizzying heights.
Last year, IPO volumes by deal value in London came in at just $7.7bn (£5.6bn), compared with $170bn in the US and $32.5bn in Hong Kong, according to data from Dealogic.
And the absence of mega cap stocks has contributed to the LSE becoming a laggard in terms of delivering returns to shareholders in recent years.
Sunak is looking at changing some listings rules to close the gap. As part of his “Big Bang 2.0” vision for the City, he has asked Lord Hill, a former EU commissioner, to conduct a review and explore possible rule changes.
The Treasury says it is “critical” to ensure the UK listings environment is well adapted to the needs of fast-growing “new economy” companies, including tech ones, and the review will examine “how to boost the UK as a destination for initial public offerings (IPOs) and optimise the capital raising process”.
Mooted changes include: dual class share structures, which allow founders to retain a majority of shareholder votes even after reducing their stakes and are popular among tech bosses; accelerated timelines for IPOs as the UK currently has the longest listing timetable of any developed market in the world; prospectus regulation; and new free float and track record requirements.
The review is broad and can look at issues outside the remit of the Financial Conduct Authority. A City source says another recommendation submitted to Lord Hill is to scrap the Mifid 2 EU rulebook, which “people feel has a detrimental impact on SME research”.
But what impact will such changes have on London’s public markets? A senior stock exchange executive says although these measures might not individually “move the needle”, together they could add up to quite a big impact.
Kingdon is less enthusiastic. He says it is “very difficult to see how there’s a structural fix” for London when New York is supported by a larger number of people with deeper pockets. And even though some rule changes could keep more companies listing here, he thinks the review is “not really facing up to what’s taking place and what would be useful [for tech companies]”.
None the less, after two years of subdued listings activity, 2021 is building up to be a bumper year for London IPOs, driven by pent-up demand.
In the first quarter, well-known groups such as Deliveroo, Moonpig and Dr Martens are set to float, while cybersecurity giant Darkspace, Danish review website Trustpilot and money transfer company TransferWise are also eyeing potential listings.
Meanwhile on Monday, four companies – including what will be London's first listed medical marijuana group – laid out plans for IPOs. And bankers say the prospective pipeline is the best they’ve seen for years.
Erik Anderson, head of corporate broking at investment bank Panmure Gordon, says the attraction of London is its well-established regulatory and legal environments, combined with an excellent professional network of investors, brokers, bankers and PR companies.
He adds: “We don't need to make lots of sweeping changes, we just need to make sure that we don't fall behind or make things worse.”
However, he thinks attracting and retaining tech giants will continue to be a difficult task due to “much, much deeper liquidity”, higher valuations and more specialism in the US. “That's something the whole of Europe has struggled to keep up with and I don't think there's a silver bullet to cure that.”
Carlton Nelson, co-head of Investec’s corporate broking business, says over the last six months, there has been a notable increase in the number of companies coming to the bank with plans to float across a wide range of sectors. And he has had discussions with some firms looking to go public in two to three years time.
But, similarly, Nelson does not think London’s listing rules are in need of a major overhaul. He says the due diligence carried out before companies list in London is “comprehensive” and he would be wary of making any changes that could “potentially risk losing the quality of that diligence process… and generate further issues down the line”.
Although a raft of companies are set to go public this year, ultra-low borrowing costs, lower valuations and a raft of take-private offers towards the end of last year also suggest de-equitisation remains a threat.
Panmure’s Anderson says one of the consequences of the crisis could be that debt levels of listed companies come down in the medium term because what used to be an acceptable level of debt might “look a bit racy” post-crisis.
Therefore, it could be easier for private equity firms to pick up assets with strong balance sheets. “Certainly we anticipate more M&A activity and more private equity purchases, but also on the flip side of that, we're seeing them floating companies as well.”
Regardless of what changes Lord Hill recommends, the pull of a higher valuation in the US appears too big a prize to turn down for Blue Prism, and Kingdon says delisting from London remains an “open question”. Immunocore, a UK-based biotech company, also announced its intention to list state-side last week.
But if the Government wants to avoid losing similar companies to the US in the future, it might start by engaging more directly with bosses and asking them how to make London a more attractive location with a competitive financial ecosystem. “Nobody [from government] has spoken to us,” Kingdon says.