London’s stock exchange was once the epicentre of City life. Now lawyers report a ‘malaise’ that is hard to shake, reports Maria Shahid. Will a much-heralded overhaul of the listing rules bring back the good times?
The low down
The London Stock Exchange once had an unassailable lead over Paris. But now the neighbouring capitals are neck and neck. Delistings and high-profile moves to other trading platforms are the cause of soul-searching in the City. One result is a loss of relevant professional experience, as a generation of corporate lawyers gains experience in M&As and takeovers, but knows little of flotations. The Financial Conduct Authority has responded with reforms that liberalise the LSE’s rigid listing and prospectus rules. Labour, as a new government prioritising growth, is committed to continue down this path. But the alleged dilution of standards is not to everyone’s taste. Lawyers focused on ethical investments warn of an unwanted fillip for any companies with an imperfect grip on corporate conduct in their supply chains.
Were you up for Bim Afolami? The economic secretary to the Treasury’s loss of his Hitchen constituency was announced around 6am on 5 July. He had arrived in parliament via Eton, Oxford, Freshfields Bruckhaus Deringer and Simpson Thacher & Bartlett, and the blue blood of deregulation runs through Afolami’s veins. As an MP and City minister, he was convinced that regulators ‘need to realise that if you’re regulating a market, in any area, there’s no point in having the safest graveyard’.
Of our markets, Afolami told a City audience last year: ‘Animal spirits need to be there, we need to drive growth and initiative.’ This was not just rhetoric. The last government ordered financial, competition and accounting watchdogs to promote UK growth and competitiveness.
While regulators can struggle to read such vivid imagery across to actual changes in policy, the Financial Conduct Authority (FCA) superintends one City institution that seems to have lost its king of the jungle instincts – the London Stock Exchange (LSE).
On 11 July, the FCA confirmed a far-reaching revision of the LSE’s strict listing rules (UKLR) and company categories, its announcement hailing ‘the biggest changes to the listing regime in over three decades’.
The new chancellor Rachel Reeves enthused: ‘These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here.’
Animal hospital
Certainly, the LSE needs reinvigorating. Its loss of primacy has been a talking point across the City. Gone are the days when London’s stock exchange towered over others. In 2022, Paris replaced the LSE as the biggest stock exchange in Europe. The LSE regained the coveted title in June, but only by a narrow margin. It is all a far cry from 2016 when its activity was valued at $1.4tn more than its French counterpart.
The exchange has had its share of challenges since then, including Brexit uncertainties, Liz Truss’s mini-budget and a weak pound. All are blamed for a slowdown in activity, amid fierce competition from other stock markets around the world.
For capital markets lawyers, this has meant a shift away from advising clients on initial public offerings (IPOs) to takeovers, mergers and acquisitions, and listings on the junior AIM market. Experienced IPO partners report a dearth of associates with the necessary experience to advise.
Daniel Simons, a corporate partner at Hogan Lovells, notes: ‘The challenge is finding a mid-level associate who can work on these deals because often their experience will be equivalent to that of an NQ.’
Meeting demand
Lawyers note a slight increase in activity in the past few months. But with a whole generation of junior lawyers lacking the practical experience of advising on IPOs, law firms face a conundrum regarding how to resource such transactions.
Brad Isaac, partner in the equity capital markets team at Fieldfisher, explains that during the pandemic several financial stimuli including lower interest rates pepped up both AIM and the main market. ‘We were looking at similar IPO numbers to back in 2006/07 at that time,’ he says.
Then, Isaac says: ‘It… fell off a cliff with the invasion of Ukraine. IPOs that we were working on getting ready to go to market were put on hold. And since then, we’ve seen interest rates and inflation going up. The pension fund and fund managers have disinvested from equities, and they have instead looked to invest in fixed income and gilts and things like that. It’s led to really depressed share prices and valuations.’
He adds: ‘The sentiment that we’ve seen in the last 12 to 18 months has been one in which companies are struggling to raise money, share prices being low, and a negative sentiment generally, particularly around the London market versus say that of the US.’
The result has been companies delisting and a fair amount of takeover activity. ‘A lot of UK companies have been taken over by private equity or trade competitors because they are undervalued, so there are real opportunities there,’ Isaac notes.
Paul Claydon, a partner at Covington advising on IPOs and M&A, comments: ‘There is a general market malaise. A lot of companies are choosing to go to NASDAQ in New York instead. By definition, the US has a much larger pool of capital, and you get a better valuation. Delisting is becoming very common [in London], and companies often stand a better chance of raising money off, than on, market.’
He adds: ‘The funding environment in London hasn’t been great. Partly this is linked to the mini-budget. Possibly, there was also a Covid hangover. Brexit hasn’t made a massive difference. European companies are still listing in London. There is a similar malaise in other stock markets.’
Simons recalls: ‘When I first started at the firm about 10 years ago, I was working on about 15-20 deals in equity capital markets [ECM] a year. In the past year, I have done about seven to eight takeovers and far [fewer] ECMs.’
Long goodbye? takeovers and delistings
For many corporate practices, a dearth of IPOs has been replaced by an increase in takeover activity.
With many UK companies undervalued, foreign buyers have been seizing the opportunity to acquire companies listed in London.
Daniel Simons, corporate partner at Hogan Lovells, notes: ‘Listed companies with lower valuations have become really attractive. Prices are low and the pound is weak, which helps if you have dollar funds, for example.’
Undervaluations have also led to companies looking to come off the market. Fieldfisher partner Brad Isaac says: ‘We’ve seen a bit of a flurry of activity over the last year or so of companies delisting, twinned with takeover, where companies are being taken over either by private equity or trade competitors because they have been undervalued. Their share price has been low and opportunities to purchase them have arisen.’
He adds: ‘So while we have been less busy on those chunky IPO mandates, our lawyers have been working on those M&A deals, so we can pivot into that.’
‘Delisting is getting common,’ confirms Covington partner Paul Claydon. ‘One of the main reasons is that companies have a better chance of raising money off-market. Our deal flow shows that good-quality companies in a growth area will get financed, but the market has become a lot choosier.’
Loosening the reins
In May 2023, City watchdog the FCA published a consultation on proposed reforms for companies listed on the main market of the LSE – a process which culminated in yesterday’s announcement of new listing rules that will apply from 29 July.
The reforms will remove the current ‘premium’ and ‘standard’ listing rules, which would be replaced by a new ‘commercial companies’ as a principal category. The reforms have been generally welcomed by the legal community.
Says Isaac: ‘There is a difficult balance to be struck because you also want London to be seen as a bit of a gold standard for listings, in terms of good corporate governance. It’s about striking that balance, which I think on the whole has been achieved’.
Proposed revisions of the UK’s prospectus and public offering infrastructure are also expected.
The reforms, Isaac says, were widely consulted on in a process that, while it originated with the Treasury, has been driven by the FCA.
‘The reforms that are coming in will be helpful,’ notes Aisling Arthur, senior counsel at Travers Smith. ‘The only downside is there are going to be some future changes that we are expecting to the prospectus rules. So there’s that slight uncertainty. We know it will ease the burden in terms of the sort of documentation that’s needed, but we don’t know how much it will ease it.’
One of the changes introduced in the UKLR – relating to the use of dual-class share structures – would allow founders to retain control of their company after an IPO.
The chair of fintech Revolut, City grandee Martin Gilbert, is among the enthusiasts. Gilbert, co-founder and former chief executive of Aberdeen Asset Management, told the Financial Times: ‘All the moves [regulators] are making are good, they’re allowing founder-led companies like Revolut to list here rather than just have no choice.’
Gilbert stopped short of committing to a UK IPO for the fast-growing fintech, however, adding: ‘Let’s see how it all pans out, the proof will definitely be what happens in the future.’
Ethical concerns
Could a change in the LSE’s fortunes come at a cost? The potential listing of online fashion retailer Shein has been touted as evidence of London’s renaissance. It would be the UK’s biggest ever. The fashion giant had initially considered floating in New York. However, following concerns over its ethics and tensions between the US and China, the company has since confidentially filed papers with the FCA, reports say.
Some UK fund managers and politicians have also raised concerns about the UK listing, warning that it could struggle to gain investor support, due to concerns over Shein’s alleged labour practices, as well as its failure to make a full disclosure about its supply chain.
In late June, UK human rights group Stop Uyghur Genocide (SUG), represented by Leigh Day, wrote to the FCA to say any attempt by Shein to list on the LSE should be blocked.
Some ESG investors have warned that if a Shein flotation went ahead without satisfactory scrutiny of allegations made against the company, it could harm the LSE’s reputation.
Shein insists it ‘has a zero-tolerance policy for forced labour’ and is ‘committed to respecting human rights’, adding: ‘We take visibility across our supply chain seriously and have invested millions of pounds in strengthening governance and compliance’.
The company said its supplier audits showed ‘a consistent improvement in performance and compliance’, including ‘improvements in ensuring that workers are compensated fairly for what they do’.
Capital flows
So what else could boost London as the destination of choice for companies looking to float?
‘There is a bigger issue than just the rules,’ Claydon says. ‘The more fundamental issue is the pool of available capital. In the US and parts of Europe, vast amounts of people tend to have equity investments. In the UK it’s the total opposite – few people have equity investments. Investor appetite and the pool of capital is the main challenge.’
‘The changes to the listing rules will certainly help to make London more competitive, but the rules by themselves won’t be enough to change its fortunes,’ adds Simons. ‘London is not the default choice for a European business anymore. The listing regime is much lighter-touch in, say, Amsterdam, and the new rules will help even the playing field. But we need more. We need to see more investment in London stocks.’
One of the challenges faced by the incoming government is convincing UK pension funds to return to the market. Isaac says: ‘It’s about stopping the outflow of capital.’
'The changes to the listing rules will certainly help to make London more competitive, but the rules by themselves won’t be enough to change its fortunes'
Daniel Simons, Hogan Lovells
The UK has the second-largest pool of pension fund capital in the world. However, UK pension funds have become increasingly averse to taking risks, choosing instead to invest in bonds.
Last July, chancellor Jeremy Hunt’s Mansion House speech included reforms to encourage greater investment by pension funds in UK companies. Here, again, the City expects the reformist agenda to survive the change of government. Labour’s manifesto pledged a review of the UK pensions landscape, and there is speculation that the new government may go further than the last in pushing funds to invest in UK assets.
Isaac views these proposed reforms as vital to boosting investment: ‘UK pension funds are being encouraged to invest in UK equities, and that will ultimately be more important than any rulebook changes.’
Interest and IPOs
The Bank of England is predicted to cut interest rates soon, and lawyers are optimistic that this will boost IPO activity. Lower interest rates feed through to a poorer return on the secure investments to which they are linked, like government bonds.
Adrian West, partner at Travers Smith, says: ‘There is always a lead time in preparing for an IPO and depending on the size and shape of a company, that could be anything from four to eight months. I think, now that there’s confidence that interest rates will fall over the next few months, clients are more willing to devote the time and resources to the early stages of the IPO process. I think by the first half of next year we will see an increase in IPO activity, and there will be more companies over the next six months starting that preparatory work.
‘The changes in the rules will definitely help, but I think also improvement in the wider macroeconomic position will drive it just as much,’ he adds. ‘At the moment you can get a decent rate on government bonds, and investors are preferring that option rather than the potentially riskier investment in a company. But when interest rates start to come down, and investors need to deploy their capital, I think they will be inclined to put their capital to work in equities rather than in debt.’
'The pension reforms might move a bit quicker following the election, but alongside this, we also need to re-educate people on how the market performing well actually affects us all'
Fiona McFarlane, Bird & Bird
Many market analysts are also optimistic about an upturn. The June listing of computer firm Raspberry Pi, advised by Linklaters, raised £172.9m and is widely seen as a sign of enhanced interest in the LSE.
‘There are reasons to believe that the outlook for the LSE is improving, with the predicted interest rate cuts in the second half of this year making investing in the stock exchange more attractive,’ notes Marc Proudfoot, partner and head of investment trusts at Howard Kennedy.
Lawyers note that knowing the likely outcome of the UK general election far in advance was good for the market. ‘Stability is always a good thing,’ notes Bird & Bird partner Fiona McFarlane. ‘The pension reforms might move a bit quicker following the election, but alongside this, we also need to re-educate people on how the market performing well actually affects us all.’
Isaac concludes: ‘There’s a slightly more positive outlook in terms of economic growth, interest rate reductions and a pretty well-expected change of government as well as an understanding of what Labour will and won’t do,’ Isaac concludes. ‘So we will probably see better market conditions at the back end of this year, and maybe into early next year.’
Maria Shahid is a freelance journalist
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