The value of initial public offerings (IPOs) on the London Stock Exchange (LSE) fell to new lows in 2023 amid a slew of companies opting for US listings. It prompted the UK government to issue reforms to boost the appeal of the country’s flagship stock market. 

The list of UK companies that snubbed the LSE to chase higher valuations in the US has been growing. Notably, and after much anticipation, UK chipmaker Arm listed on the Nasdaq last year in the US’s biggest IPO since 2021.

It is not only the primary market that is under pressure. Companies that are already listed on the FTSE are also moving across the Atlantic. One of them is Dublin-based Flutter, whose board has put forward a proposal to move the firm’s listing to the New York Stock Exchange, the company said in a statement in January. 

These setbacks reflect the business community’s wider sentiment towards the LSE. UK advisory firm Teneo found that 81% of the British CEOs it surveyed in late 2023 said the value of being listed in London had declined over the course of the year. Roughly a third of them have considered moving their listing overseas, the survey says.

There are several factors that have determined the ongoing demise of the LSE. In some respects, the stock exchange has faced a perfect storm. Regulatory hurdles sunk investment by local pension funds into UK stocks. In the meantime, the rise of the ‘Magnificent Seven’ tech giants’ stock boosted Wall Street’s valuations beyond reason, deepening the divide with the LSE. Besides, the global IPO market as a whole is on a downward trajectory as companies tap alternative sources of capital other than stock markets.

Many in the investor community continue to see the glass as half-full, highlighting the discount at which UK stocks are trading. However, the LSE’s shrinking primary and secondary markets suggest a turning point is not yet in sight.  

A lacklustre 2023

The total value of the 19 new stock listings carried out on the LSE in 2023 fell below $1bn ($972m), the lowest level since data provider Dealogic started tracking IPOs on the LSE. London’s share of the global IPO markets thus remained below 1% for the second year in a row, Dealogic data suggests. Its heyday is a distant memory. In 2006, the peak of its glory before the financial crisis, the LSE accounted for almost a fifth of global IPOs by value (17.7%). 

“The UK stock market has, once again, frustrated those who were convinced it was cheap and lived down the expectations of those who asserted it was cheap for good reason,” AJ Bell, investment director of the company that bears his name, said in a statement in December.

The quality of UK IPOs has also been a concern. CAB Payments is now trading at a quarter of its listing price after it revealed its key business was under threat from new foreign exchange rules in Nigeria. WE Soda, a Turkish soda ash company, pulled its IPO when investors baulked at the $7.5bn market capitalisation for which it was aiming.

“Another reason behind [UK equities’ lack of appeal] is that in pools of long-term capital such as UK pension funds [and] insurance companies have massively reduced their allocation to UK equities over recent years,” explains Jason Hollands, managing director of corporate affairs at financial services company Evelyn Partners. 

With many defined benefit UK pension schemes closing and subsequently moving into bonds and implementing liability-driven investing strategies, the “natural owners of UK equities” reduced their allocations, he adds.

In 1997, UK insurance and pension funds’ proportions of UK quoted shares had a combined total of 45.7%, according to the Office for National Statistics (ONS). As of 2022, this has plummeted to 4.2% of UK listed shares, the lowest proportion held by these two investor classes on record.

“This downward trend may be caused by several factors, such as companies expecting more profitable returns on overseas shares as well as changes in pension fund regulations,” the ONS noted in a release in December. 

With UK institutional investors playing a reduced role, the weight of foreign investors has increased from 35.7% in 2000 to 57.7% in 2022, ONS figures show.  

Reform agenda

The rising anxiety among CEOs and companies has come alongside reforms outlined by the UK government. In July, UK chancellor of the exchequer Jeremy Hunt laid out the Mansion House reforms, which included draft legislation, aimed at boosting the deployment of UK pension fund capital on the LSE.

“I want the world’s fastest-growing companies to grow and list right here, making LSE not just Europe’s Nasdaq but much more,” Mr Hunt said in a statement.

This followed an announcement from the Financial Conduct Authority, the UK’s financial regulator, that it will streamline the listing rules, replacing its existing ‘standard’ and ‘premium’ listing segments with a single category for equity shares in commercial companies. 

Taken together, says Charlie Walker, deputy CEO of the LSE, all of these components constitute “the biggest reform since the 1980s” in what he describes as a “tapestry of work that is deliberately addressing all of the things that make up the UK capital markets”.

Mr Hunt acknowledged in his Mansion House speech in July that London lost 44% of its quoted companies between 1997 and 2019.

Because no single factor is at the root of London’s fall from favour, no single adjustment will address all of the key issues holding it back. Still, many City insiders remain optimistic about the LSE’s future.

Scott McCubbin, EY’s UK and Ireland IPO leader, says that despite losing out on IPOs to the US,  the “fundamentals of London are sound”.

“The infrastructure is already well established: the investor community, the banking community and the advisor community, it’s all there,” he stresses. 

But with fewer listings, the LSE is behind where it should be and needs to adapt to a new world order, he says. “Has it failed? Absolutely not. Does change need to happen? Absolutely yes.”

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This article first appeared in the December 2023/January 2024 print edition of fDi Intelligence