Has London’s IPO market run out of steam?

Rhys Merrett, Senior Account Director, The PHA Group

 

The UK’s transition out of lockdown was approached with a degree of caution. The disruption caused by the pandemic instilled permanent changes to the way in which businesses operate. It also brought economies to a standstill, with the financial services sector attempting to navigate uncertain circumstances.

Positively, the months following the lockdown were marked by a visible surge in investment and spending. Pent-up investment capital was injected into the financial markets via private equity and venture capital funds, while on the merger and acquisitions (M&A) side, domestic and outward M&A deals were on the rise. After navigating the economic uncertainty brought on by the pandemic, the financial services sector bounced back with a hive of activities in H1 2021.

Move forward, 12 months and it seems as though the immediate optimism sparked at the beginning of 2021 has started to wane. A host of new challenges face the UK, some a consequence of the pandemic like rising inflation while others a consequence of actions on the geopolitical stage. As a consequence, there are fears that instead of a full blown recovery from the pandemic, we could instead be on the verge of a recession.

Rhys Merrett

Such a forecast should not be assumed and requires careful assessment. The fact that analysts are beginning to question the health of the economy stems from recent trends. One of these has to do with the number of Initial Public Offerings (IPOs) taking place in the UK.

IPOs are a positive reflection of a healthy market geared for growth. They achieve this by fuelling the growth of economies and broadening the number of investment opportunities on offer for both domestic and foreign investors. IPOs also facilitate innovation, create jobs, promote productivity and provide incentives for private companies to consider a public listing in a particular jurisdiction.

However, a new analysis from KPMG’s UK Equity Capital Markets has revealed that IPO activity in not only the UK, but globally, has drastically dropped. Only 11 companies listed in London in the opening six months of 2022, raising £0.5 billion. This is a huge drop from H1 2021, when there were 40 listings which collectively raised just under £10 billion. Given this 95% decrease, it is necessary to question not only why this has occurred, but whether this is the beginning of a long-term trend for IPOs in the UK?

 

The future of IPOs in post-Brexit Britain

One theory is that the UK’s rules and regulations linked to IPOs are pushing companies to other stock markets, like Amsterdam. Part of this has to do with the long-term future of the UK post-Brexit, and the extent in which it can retain its position as global hub for investment. It will have to deal with increased competition. Scheduled for later this year, the EU listing act will introduce new proposals that give founders the ability to retain more control of their companies while being able to use dual-class share structures.

Another issue has to do with valuations. High profile IPOs of high-growth tech companies like Deliveroo have suffered a significant loss, with the company’s value down 75% since first being listed. Finally, questions over the country’s political leadership have stalled planned public offerings. Most recently SoftBank announced it has stopped working on a London IPO for chip designer Arm as a result of the Conservative leadership contest.

Despite these challenges, it is wrong to assume that the UK is no longer the finance and investment hub it was pre-pandemic, and indeed, pre-Brexit. In reality, all economies around the globe are dealing with the aftermath of the pandemic, including pandemic. There is also potential fallout linked to geopolitical events, such as the Russian invasion of the Ukraine.

Taking a long-term perspective is crucial. For example, research by Datasite, a SaaS provider for the M&A industry, shows that the outlook for dealmakers in the UK is positive. Seven in 10 (71%) are anticipating an increase in activities over the coming 12 months. Looking at the type of deals, half (50%) expect the biggest increase to be in debt financing, while 43% identified transformational acquisitions or mergers.

The fact of the matter is that financial markets are in a period of adjustment. If we look at cryptocurrencies, price volatility and radical swings have resulted in significant losses from the peak prices recorded during the pandemic. The most prominent of these has been Bitcoin. While some see these price swings damaging the long-term usability of decentralised finance, others see this as part of cryptocurrencies evolution as it becomes integrated into the global financial system.

For now, it is difficult to tell what the future has in store for the UK when it comes to IPOs. Once the leadership contest is over, the government will have the opportunity to put together a strategy which ensures London can remain a top destination for public listings. Competition is rife, and should London be able to tackle these challenges head on, it can remain a global hub for not just IPOs, but financial services and financial technology.

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