Will these new rules make UK investment capital of the world?

Global stock markets have enjoyed something of a purple patch. There was also a post-pandemic boom, preceded by the longest bull market in history, born out of the global financial crisis. Major stock markets have done well, but Wall Street has generated by far the biggest returns each time. London has underperformed, though, and its reputation has suffered. However, if the regulator and politicians have got it right, “the biggest changes to the listing regime in over three decades” - which went live this week - could finally “reinvigorate” the UK’s capital markets.

London has long battled with New York, Frankfurt, Paris and other leading financial centres for investors’ money. Its position as the world's top financial centre was snatched away by New York in 2018, two years after the UK voted to leave the European Union.

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According to data from think tank Z/Yen, which studies the competitiveness of world financial centres, second-place London is still way behind New York and only just ahead of Singapore, Hong Kong, San Francisco and Shanghai. And in Europe, while Geneva, Frankfurt, Paris and Zurich all trail the capital, their ratings’ increase last year was more than double that of London.

And data from Bloomberg recently revealed that London accounted for not much more than 2% of the $11.9 billion (£9.4 billion) raised in European company flotations this year, the lowest in decades, and which compares to an average of 31% between 2012 and 2023.

Nothing the UK has done since it voted to leave the EU has stemmed the flow of companies either leaving London for other markets like New York, or choosing to list their shares in the US.

Cambridge-based chip designer ARM Holdings ADR (NASDAQ:ARM) last year picked Wall Street over London, while in April private equity firm CVC Capital Partners (EURONEXT:CVC) chose to list in Amsterdam. Paddy Power owner Flutter, building materials company CRH, packaging giant Smurfit Kappa and plumbing supplies firm Ferguson have also switched to New York listings. And large companies such as DS Smith (LSE:SMDS), Royal Mail owner International Distribution Services (LSE:IDS), Hargreaves Lansdown (LSE:HL.) and Darktrace (LSE:DARK) either have been or are in the process of being acquired by foreign buyers.

It’s not just the main market where conditions are difficult. We recently reported on data showing the number of AIM companies at a 22-year low. There were just eight IPOs on the market for smaller growth companies in 2023-24 compared with 58 the year before.

The biggest problem for many companies either trading on the London exchange or considering doing so, is inferior liquidity on UK equity markets compared to New York especially, and the potential for higher valuations in the US.

So, how does the UK financial regulator and new Labour government plan to stop the rot and rebuild London’s reputation as a destination for companies and capital raising? And the all-important question – will it work?

New UK listing rules

In a nutshell, the Financial Conduct Authority (FCA) has simplified the listings regime with a single category for commercial companies - rather than “premium” and “standard” listing segments - and streamlined eligibility for companies wanting to list their shares in the UK. 

There are two main thrusts to the new rules - dual-class shares and shareholder approval. The first lets founders, employees, pre-IPO investors and institutional investors own dual-class shares that give them enhanced voting rights over other shareholders. The second proposal means shareholder approval will now not be required for related-party or significant transactions such as acquisitions or deals, although they will still need to rubber-stamp key events such as reverse takeovers and taking a company’s shares off an exchange.

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The objective here is to get more technology companies listing their shares in the UK. While it’s currently impossible to compete with the US in this space, two of the UK’s existing venture capital (VC) schemes - Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – have already established a strong start-up culture here. So much so that only the US and China do more VC deals.

The problem, though, is that we've not been so good at incubating companies through to stock market listing. It means the weight of technology, media & telecoms (TMT) in the FTSE 100 is only about 4%, far behind the US, Germany and France. Relaxing the requirements around dual-class shares that start-up founders like, should help.

About 44% of tech companies listed in the US had a dual-class share structure in 2023, according to Jay R. Ritter, Cordell professor of finance at the University of Florida, twice as many as non-tech IPOs.

Dual-class shares are believed to be a big consideration for high-growth companies deciding where to list their shares. As law firm A&O Shearman explains: “The main argument in favour of this structure is that it allows visionary founders to focus on the company's long-term strategy, growth, and performance without worrying too much about short-term targets.”

However, relaxing the rules on shareholder voting, specifically disclosure of related-party and significant transactions, might upset a lot of people and ramp up the element of risk involved when buying company shares. The biggest issue is the clear conflict between dual-class share structures and the principle of 'one-share, one-vote', considered a fundamental investor protection. Ditching this requirement does raise the issue of corporate and boardroom accountability.

But analysts at Deutsche Bank are positive. The bank says: “The new rules state that institutional investors (including sovereign wealth funds), not just people, can hold super voting shares. This is a big win for private capital as it gives additional options for private equity investors. It may also be the tipping point for some investors to decide to stay and list a business in the UK versus moving to a jurisdiction that allows this.

“Giving private equity additional options will reinforce the UK as the dominant centre in Europe for private capital. That also follows the recent smooth election process, while the amount of take-privates in the UK so far in 2024 signals that confidence in the country is strong.”

Political timing

The introduction of new rules also comes at an opportune time. A new, more business-friendly Labour Party has won a landslide victory at the polls, just when France and others in Europe are struggling with political uncertainty.

“The financial services sector is central to the UK economy, and at the heart of this government’s growth mission,” says Chancellor of the Exchequer Rachel Reeves. “These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.”

Reeves has already told officials to align the UK Infrastructure Bank and the British Business Bank (BBB) under a new National Wealth Fund tasked with investing in “the new industries of the future”.

An extra £7.3 billion has already been earmarked for investments, and planned reforms to the BBB will help “mobilise the UK’s deep pools of institutional capital”.

That’s expected to be dwarfed by money from some of the country’s biggest insurers and savings companies that form part of the Investment Delivery Forum, established last year to get institutional and pension money into infrastructure projects such as electric vehicles and nuclear energy.

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We've also just had an update on the FCA’s Consultation on the new Public Offers and Admissions to Trading Regulations regime (POATRs).

The key proposal here is that most companies already listed on the stock market will no longer have to issue an expensive prospectus when raising new money – the threshold for a prospectus for secondary fundraisings is raised from 20% of issued share capital to 75%.

“We anticipate significant potential benefits in reducing the range of circumstances where a prospectus is required to be produced by issuers making further issuances,” says the FCA, with proposals likely making the process much quicker and easier.

The regulator estimates the potential net benefits over a 10-year period to be around £248 million, while giving companies greater control over the timing of their capital-raising to get the best price and take-up of their offer.

Overall, the FCA’s proposals have a clear logic and a chance of success. It’s not considered likely that many new companies will decide to use the dual-class structure, and a simplified listing process should be attractive for potential IPOs.

However, it’s always been the case that when investing in small companies, and indeed investing more broadly, there is risk involved. These new rules potentially increase those risks, especially around new listings, so now more than ever, the principle of caveat emptor applies.