The conditions for London’s IPO market are continuing to worsen, with fundraising numbers falling short compared to some lesser-known markets.

This year, initial public offerings in London have dropped by roughly 9%, amounting to about $1 billion. This decline has pushed the UK down to the 20th position in a global ranking of IPO venues, according to data from Bloomberg through the end of November.

The UK market has been surpassed by emerging markets like Oman, which is just 1% the size of the UK, as well as Malaysia and Luxembourg. This change is a stark contrast to only a few years ago when London consistently ranked among the top five global IPO hubs.

The current rankings underscore the considerable challenges facing the UK: low valuations, a hesitant local investor base, and rising competition from other financial centers. Although the UK has recently updated its listing rules, both investors and industry insiders believe further measures are necessary to rejuvenate the 300-year-old exchange.

This year, around a dozen companies have gone public in London, with the largest raising just over £150 million ($191 million). None of London’s listings broke into the top 100 globally, as countries like Greece, Sweden, and South Africa hosted more substantial offerings. Moreover, several billion-dollar share sales have taken place on major Middle Eastern exchanges as more nations aim to have their national champions listed domestically to bolster their capital markets.

“Governments are making significant efforts to attract more companies, resulting in increasing competition,” said George Chan, global IPO leader at EY in Shanghai. “Without changes to the landscape, it will take a long time for the UK to regain its position at the top.”

Emerging Successes

The majority of this year’s IPO activity has been centered in the Middle East and Asia, which are responsible for over half of the year’s overall fundraising and boast five of the ten largest deals globally.

Last month, Talabat Holding Plc, a subsidiary of Delivery Hero SE, successfully achieved a $2 billion IPO in Dubai, significantly increasing the deal size and pricing at the upper end of its range. This listing is now recognized as the largest tech IPO worldwide this year. In October, Lulu Retail Holdings Plc priced a $1.7 billion offering in Abu Dhabi, while an affiliate of Oman’s state oil firm gathered an additional $2 billion.

Asia has also seen impressive listings, such as Tokyo Metro Co’s $2.4 billion IPO in October and Hyundai Motor Co’s $3.3 billion flotation of its Indian subsidiary.

“London, like other European markets, is encountering intensified competition from domestic markets in a way it hasn’t seen in the past 8 to 10 years,” commented Chris Laing, HSBC Holdings Plc’s head of equity capital markets for Central and Eastern Europe, the Middle East, and North Africa.

Gaining Valuations

A prime illustration of this trend is the Middle Eastern oil and gas driller ADES Holding Co. It made its market debut in the UK in 2017 but saw its market value diminish by half by 2020, falling below $400 million. The company was then privatized in 2021 by a consortium supported by the Saudi sovereign wealth fund.

Since its buyout, ADES has experienced significant growth and was relisted in Saudi Arabia last year with a market valuation of around $5.5 billion, trading at 24 times its projected earnings — roughly quadrupling its valuation since its time in London. Currently, around $30 million of its stock is traded daily, over 100 times the average turnover during its last year in London, and it is now covered by double the number of research analysts.

While the number of IPOs has decreased, the UK stock market is witnessing a significant drop in listings due to mergers and acquisitions occurring at the fastest rate in over a decade.

According to Bloomberg, around 45 companies have exited the London exchange this year via mergers and acquisitions, representing the highest count since 2010. Many of these are mid-cap firms with limited analyst coverage and low trading multiples compared to their counterparts in other markets.

These attractive valuations have drawn the interest of major private equity firms. KKR & Co has executed two buyouts of London-listed entities this year, acquiring a smart metering company and a network management software provider for utilities. EQT AB has completed two deals as well, alongside firms like Brookfield Asset Management, CVC Capital Partners Plc, and Fortress Investment Group, all involved in take-privates of UK companies.

Contraction of the Market

Several companies have also opted to exit the London exchange due to low liquidity. In November, food delivery service Just Eat Takeaway.com NV announced its plans to delist from London, opting for a sole listing in Amsterdam. This week, Ashtead Group Plc revealed its intention to shift its primary listing to the US, describing it as the “natural” long-term site for the construction equipment rental firm.

Some activists are calling for other companies to follow suit, with Palliser Capital ramping up its push for miner Rio Tinto to drop its London primary listing. Companies like travel group TUI AG and pharmaceutical firm Indivior Plc have already exited their UK listings or moved their main stock quotes to other markets.

CS Venkatakrishnan, CEO of Barclays Plc, stated at a conference this month that the UK equity market has been undergoing “structural decline for over 30 years,” partly attributed to the risk appetite of domestic pension funds. He even humorously expressed a desire for “more dynamic” companies on the London exchange rather than a bank with a three-century legacy.

Meanwhile, some promising tech firms that London seeks to attract are looking at other markets. Nik Storonsky, the CEO of fintech company Revolut, recently expressed a preference for an IPO in New York, deeming the London market as “far less favorable” and labeling it “irrational” to list there. His remarks follow the decision of chip designer Arm Holdings Plc, based in Cambridge, England, to list in the US last year.

Companies are retreating from the London market due to unsatisfactory valuations, according to Liad Meidar, managing partner at Gatemore Capital Management. This year, the number of firms delisting from the London exchange for various reasons has outnumbered the number of IPOs by more than tenfold, based on Bloomberg data. Additionally, UK-focused equity funds recorded 41 consecutive months of net outflows up to October, only returning to net inflows in November, according to Calastone Ltd.

“The UK is experiencing stagnation — the general sentiment surrounding capital markets is negative,” pointed out Meidar. “Global investors find it easier to access capital in the US market.”

Consolidation in Brokerage

The sluggish state of London’s IPO market and the dwindling number of UK-listed companies have adversely affected local advisory firms that aid companies in raising capital and managing investor relations. Shore Capital Group Ltd., a UK corporate broker, reported a 69% drop in pretax profits within its capital markets division for the first half of the year. WH Ireland Group Plc, another competitor, sold off its capital markets division to strive for profitability.

These obstacles have led to heightened consolidation in the industry, with various firms diversifying their service offerings. Peel Hunt Ltd. has underscored the portion of its income derived from mergers and acquisitions as its trading business has slowed down recently. Panmure Liberum has established debt advisory services and formed a dedicated team to assist firms in acquiring private capital.

Still, industry experts argue that the outlook isn’t entirely grim. Equity capital markets remain active beyond IPOs, with the overall volume of share sales and rights offerings soaring 60% this year to $30.8 billion, according to Bloomberg. London has also attracted some international listings, although without raising capital. In August, CK Infrastructure Holdings Ltd., based in Hong Kong, achieved a secondary listing, while French conglomerate Vivendi SE plans to spin off its pay-television division Canal+ SA on the UK exchange this month.

The fast-fashion behemoth Shein is contemplating a London IPO as early as 2025 after previously struggling to list in the US. Other firms, like Canopius Group, a Lloyd’s of London insurer backed by Centerbridge, are eyeing a £3 billion valuation for their anticipated listings next year. Furthermore, the private equity-owned consumer credit firm Newday is considering a London share sale in the latter half of next year, potentially valuing the business at over £1.5 billion, according to informed sources.

A representative from the London Stock Exchange Group Plc noted that IPOs are not the only measure of the health of UK capital markets, asserting that the total volume of primary stock offerings exceeds that of other European exchanges.

“We are hopeful about the influx of companies ready to go public and foresee increased activity following the implementation of the updated listing regulations earlier this year,” the spokesperson mentioned.

The UK government is actively working to revamp the market. This year, it introduced the most significant reforms to listing regulations in over 30 years, allowing for dual-class stock structures to attract more tech companies. Additionally, there are plans to ease the restrictions related to the disclosure of major transactions. Prime Minister Keir Starmer has committed to removing regulations that stifle economic growth, aiming to build confidence among international investors.

Alexandra Jackson, a fund manager at Rathbones Group Plc, commented that limited fund inflows into the UK are hindering IPO activity. Listing candidates may be waiting for more momentum before launching an offering, although she noted that investors are keen to finance promising enterprises.

“While the pipeline of candidates isn’t significant at the moment, we hope to see more come to light,” Jackson stated. “We need to reignite some excitement in the UK.”

© 2024 Bloomberg

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