As major players head for US, is the London stock market dead?
Red tape and pension rules are blamed for the City’s decline, write Matt Oliver, Simon Foy and Oliver Gill
Asked why companies are fleeing the London Stock Exchange in favour of the US, David Schwimmer put a brave face on. “If companies are going to make decisions when most of their business is in the US, that sort of is what it is,” the London Stock Exchange chief executive said yesterday.
“London continues to be a great listing venue.”
Schwimmer was speaking just after CRH, the world’s largest building group, had revealed plans to ditch London for New York, depriving the City of a £30bn behemoth.
Hours earlier it was reported that Arm, the Cambridge microchip pioneer, was also headed to Wall Street, barely a fortnight after gambling giant Flutter said it too may switch its primary listing to the other side of the Atlantic.
Last year plumbing products maker Ferguson made the same switch and, earlier this week, it emerged that Shell had seriously considered a US listing before opting to stick with London.
Oliver Lazenby, a partner at Freshfields Bruckhaus Deringer who is advising Flutter, told Bloomberg he is “speaking to several other companies” who want to shift to New York.
The stream of businesses fleeing the London market threatens to become a flood. Meanwhile, there are scant examples of companies making the reverse trip and coming to Britain.
Among senior figures in finance, there is a general sense that London is losing its global competitiveness, weighed down by mountains of red tape and pension regulations that have slowly choked off vital sources of capital. Brexit uncertainty, too, has left British companies valued more cheaply than their foreign peers.
It raises the question of how much longer London will be able to call itself a world-class stock market – and whether it may be already too late to reverse the current slump.
Government ministers, City grandees, regulators and LSE itself have long grappled with how to make London more competitive. The issue has been given added urgency by the recent passage of Joe Biden’s colossal Inflation Reduction Act, which is spraying money at businesses like confetti and attracting more investment into the US.
Chancellor Jeremy Hunt’s recent announcement of the so-called Edinburgh Reforms is a first stab at fixing the problem. The new rules are aimed at bringing London listing requirements in line with peers and triggering a “Big Bang 2.0”.
But there is still a nagging sense of drift. Investors have warned for years that London was losing its edge, and the decline seems to be accelerating.
Sir Paul Marshall, the chairman and co-founder of hedge fund Marshall Wace, claimed the City was in danger of becoming “a sort of Jurassic Park” in 2021, blaming penny-pinching fund managers for being more focused on income than innovation and growth.
He said: “This is a Europe-wide phenomenon and not confined to the UK. It reflects the very weak position of Europe in almost all the main growth industries of the future, and the almost complete absence of a growth-oriented investor base.”
A major barrier to attracting dynamic businesses is the large amount of paperwork associated with being listed in London.
For example, rules for so-called premium listings in London – which companies need to qualify for FTSE indexes – say boards must disclose any transaction worth more than 5pc of their business, as well as issuing a detailed prospectus and holding a shareholder vote on the matter. The onerous process takes months and costs a small fortune.
Charles Howarth, a partner at City law firm CMS, says: “As a result, listings which should be natural fits for London are going to other markets.”
The UK currently boasts the highest number of “unicorns” – private companies worth $1bn (£837m) or more – outside of the US and China. But one senior City figure fears they are simply being “fattened up in the UK, ready for the US to eat them”.
The Financial Conduct Authority is now looking at replacing Britain’s premium and standard listings with a single class that would allow companies to follow less stringent disclosure standards so long as they make this clear to investors.
Yet it is not just market structure that has left London lagging. Our risk-averse investors also discourage companies from choosing Britain.
Investors in the London market typically prefer “reliable, dividendpaying companies” to faster-growing ones that reinvest in their businesses, Howarth says.
Britain’s risk-averse approach is clear in our pensions sector, which is the second largest in the world. Far less retirement cash is invested in equities than in other countries, with funds instead preferring bonds.
That in part reflects a tough regulatory clampdown that followed a series of high-profile savings scandals involving Robert Maxwell, Equitable Life and BHS under Sir Philip Green, to name a few.
However, Steve Webb, a former pensions minister and now partner at consultancy LCP, says the rules have made funds “excessively prudent”.
Some international investors have also shunned the City in the wake of Brexit and amid political uncertainty, compounding the problem. All of these factors have led to a dearth of new listings and prompted some companies to quit Britain. The number of Uk-listed companies has fallen by about two fifths since the financial crisis and the London market accounted for only 5pc of global listings between 2015 and 2020.
At its peak in 2007, the London stock market was worth £3.6trillion. Yet at close last night the market was worth £2.6trillion. Over the same period the US stock market has doubled in size, according to Bloomberg data.
Late last year Paris overtook London as Europe’s biggest stock market in a blow to national pride.
A veteran adviser, who works with several major British companies, believes unlocking pensions could be a “one leap and we’re free opportunity” for reviving the market.
Sir Tony Blair and William Hague suggested in a recent report that Britain’s 5,300 final salary pension schemes be encouraged to combine into 100 or so mega funds, with tax breaks withheld unless they invest a quarter of funds into UK assets.
This could unleash a huge new flood of money to power Britain’s ambition to become a “science superpower”. City insiders say it will also be crucial to ensuring that innovative companies that are founded here can grow here rather than fleeing overseas.
However, some fear it may be too late. As the market shrinks, it becomes harder and harder to attract new listings and hang on to existing ones.
Schwimmer said departures from the LSE “tend to get a lot of focus” but added: “There’s real opportunity to improve.” Whether they are grasped is another question.