Reeves must go beyond FCA reforms to save London listings

City Voices (ES)

The Financial Conduct Authority’s (FCA) listing reforms announced today lay the groundwork for a revival of London’s status as a major global corporate hub.

But simplifying the route to market must be followed up by efforts to get British pension funds investing in London listings.

Backing the FCA’s move, newly minted Chancellor of the Exchequer Rachel Reeves herself acknowledges the reform package is only a “significant first step”.

The London Stock Exchange (LSE) is thinning out. US and other overseas buyers are showing increasing interest in acquiring those London-listed companies that receive just a tiny proportion of their revenue from the UK, dealmakers have told us.

LSE-listed medical devices giant Smith & Nephew’s chairman Rupert Soames dubs these stocks “British in Listing Only” - or “BRILOs” - on the dealmaking circuit.

Emblematic of UK-listed companies’ pull on overseas investors is cybersecurity-focused FTSE 100 constituent Darktrace’s £4.3bn takeover approach by US private equity firm Thoma Bravo earlier this year. Darktrace only listed on the LSE in 2021.

So far this year, 10 UK-listed companies have been pursued by buyers in deals that – if they all come off – would total £21.4bn, according to Mergermarket data.

UK equity valuations are languishing in the opinion of many bankers. International companies listed in London carry out global operations in multiple currencies against the background of sterling’s decade-long slide against the US dollar.

Telecoms giant Vodafone [LON:VOD], with just 19% of its revenues coming from the UK, is among London-listed multinationals reportedly attracting takeover interest.

Reeves has her work cut out to Make UK Listings Great Again.

A UK JOBS Act?

It’s against this backdrop that the FCA has today intervened.

Taking the standard and premium listing status and condensing both into one single category, reducing reporting and voting requirements for executive boards, giving owners and institutional investors alike the option of retaining enhanced voting rights for longer periods – it’s a serious package to spur IPOs.

There will be the usual pinstriped chuntering about shareholder protections. The reality is that these reforms bring London into line with other top international exchanges in New York and Amsterdam.

“There is now little regulatory reason not to list on the LSE,” one top advisor told us.

The package has some similarities to the US Jumpstart Our Business Startups Act (JOBS Act), signed into law by US President Barack Obama in 2012, which also eased US securities regulations to promote business growth and equity investment in startups.

Though it had its critics at the time, many dealmakers see the JOBS Act as having been fundamental to the NASDAQ’s domination of US tech IPOs.

But listings experts agree the critical issue for the City is the dramatic decline in pension fund cash allocated to UK equities.

Today’s moves do not directly address this fundamental problem.

Why don’t pension bosses invest more in UK stocks? Because fund managers face huge backlash for losing money from UK pension pots if their holdings turn sour. Following the Robert Maxwell pension fraud in the 1990s and losses felt during the credit crisis, UK investors favour dividend yield stocks over risky growth assets.

Political chaos around the Brexit referendum and the revolving door of prime ministers haven’t helped matters.

Without that flow of pension capital, the number of IPOs taking place in London has declined markedly.

Over the past three years, the number of international companies listing in the UK has notably shrunk. Non-domestic IPO volumes were just $26m in 2023. And though this year has already surpassed that number following the $358m IPO of Air Astana [LON:AIRA], the Kazakh carrier is down almost 15% from its IPO price.

But perhaps the real prize is to get fast-growing tech firms founded here in the UK to undertake their IPOs in London and grow their overseas footprint, while remaining listed on the LSE for the long term.

London's top domestic listing this year was the GBP 172.9m IPO of budget computer developer Raspberry Pi [LON:RPI], which has seen its stock rise 45% in value since its June debut. There are hopes that other interesting small and mid-cap IPOs might follow.

London needs a whole punnet of Raspberry Pis.

Former Chancellor Jeremy Hunt unveiled a so-called ‘Mansion House Compact’ to get pension funds firing cash into the UK stock market in 2023. But its voluntary approach and lack of incentives left the effort something of a damp squib.

Mandating pension funds to step up would be a radical move – and one Reeves might want to keep in reserve for now.

If that’s the threatened stick, she could still dangle the carrot of sweetening pension funds’ capital gains tax treatment for UK shares, or at least removing the 0.5% Stamp Duty on their purchase of London-listed stock.

The FCA has gone as far as it can, with Reeves’ blessing.

Shifting the listing culture will be a challenge. But with the new Labour government’s number one mission being to drive the fastest growth in the G7, it cannot afford to duck it.