Analysis | London Can’t Rebrand Its Way to Nasdaq Domination

Filed in Business by on July 22, 2022 0 Comments

How

The UK financial regulator is worried that London’s two-tier stock market — with its confusing “standard” and “premium” routes to listing – isn’t working. Companies that don’t qualify for the top slot would rather go to exchanges like Nasdaq or Euronext Amsterdam than take their place in what they see as a second-class category. The snag is that the Financial Conduct Authority’s attempted solution risks some unintended consequences.

You certainly wouldn’t arrive at the UK’s current listing regime if you were starting from scratch. A company going public via the “standard” option must essentially adhere to the minimum European Union criteria; or it can go for the premium segment, which has additional governance and disclosure requirements — often talked about as a sort of gold-plating.

Many firms have long been willing to accept the additional strictures and costs of a premium listing for a simple reason – it’s a precondition for inclusion in the FTSE index series. That means tracker funds must buy the shares, potentially boosting the stock price. The snag is that companies that can’t tick all the premium boxes will often just zip off to venues outside the UK.

It’s not just the likes of London-based online luxury retailer Farfetch Ltd., which staged an initial public offering in 2018 in New York where it could have two classes of shares. Biotechs fall foul of the need for a three-year revenue history. Companies built through acquisition can find the requirement for historic financial data covering 75% of the business prohibitively costly.

The problem was brought into the foreground by former EU Commissioner Jonathan Hill’s review of the UK listing rules last year. He suggested rebranding the standard segment as the “Main” market, and called for the link between premium listings and index qualification to end.

In responding to Hill, the FCA is proposing not a rebrand but moving to just one set of rules. There would be requirements, but the emphasis would be on investors rather than regulators deciding whether a company could list, using the disclosures in the prospectus.

At the same time, companies could voluntarily subject themselves to golden governance standards that the FCA would oversee. The snag with this second step is that it feels a lot like recreating the two-tier market all over again. It would also create another proxy for index inclusion based on listing rules, perpetuating the difficulty that Hill was rightly seeking to address.

The UK needs to be realistic about what’s going on and what it’s trying to achieve. The US not only makes it easier for tech and biotech companies to go public but also has a well-developed ecosystem of analysts and investors that reinforces its attractiveness. Building something comparable in the UK (and Europe) will take time.

For international companies that don’t want to list in New York, London was the automatic choice before Brexit but is no longer. Companies need positive reasons to opt for the UK rather than the EU. It’s no surprise that buyout firm CVC Capital Partners is veering to Amsterdam for its IPO.

Against that backdrop, London needs a simpler and ideally unified listing regime that is at least as robust as its competing scholarships. The approach should be to ask what regulation needs to be layered on top of the US and European minimums — neither “racing to the bottom” nor striving for a zero-failure market. Freshfields’ Mark Austin, author of a separate review into capital raising by listed companies, argues there’s “no point in having a theoretically perfect regulatory regime” if it doesn’t attract companies and investors.

Tiered listing categories work only if they don’t become closet index criteria. It would be better to devise a single framework by creating more flexibility around the more restrictive elements of the premium segment. That will of course mean investors have to do more homework on what they’re buying in an IPO, instead of relying on a regulatory gatekeeper, but that is no bad thing. As for freedoms once listed, the FCA asks whether the threshold for companies putting proposed takeovers to a shareholder vote should be raised, removing a disadvantage for UK buyers in auctions. That makes sense. Such a reform would effectively put greater onus on managers to command the implicit support of shareholders for their acquisition strategy.

The regulator is also mindful of competition from private markets. Growth in private capital means companies are going public later in their lifespan. But when they do, it’s usually a matter of necessity — to enable employees to sell stock or to gain an acquisition currency. The competitive dynamic is clear: It’s not between going public or staying private, but between London and other listing venues.

More From This Writer and Others at Bloomberg Opinion:

• Brexiteers Want a Piece of the Bank of England: Paul J. Davies

• SoftBank’s Arm Is Best Off Listing in London: Chris Hughes

• Tokyo’s Superhero Stocks Should Take Center Stage: Gearoid Reidy

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available on bloomberg.com/opinion

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