In March, the owners of British chip designer Arm, Japan’s SoftBank, said it would shun a London flotation and had decided to pursue a sole listing of the business in the US. The Cambridge-based business, whose chip architecture is used in about 95% of smartphones globally, is widely regarded as the jewel in the crown of the British technology industry.
Arm was once listed on the London Stock Exchange, but it was bought by a foreign investor at a time when sterling was weak. It’s now off to New York, where the technology lights burn much brighter despite intensive lobbying by the British government.
Mounting concerns that London is losing its appeal for the most exciting technology companies is real. Clearly, executives at both established and start-up technology businesses do not favour London listings over New York. Gains in technology companies have resulted in the Nasdaq Composite rising by more than 25% in the year so far.
Why do tech companies avoid a UK listing?
One argument cited is that The City’s ecosystem is stuck in the slow lane. The FTSE 100 contains businesses such as HSBC, GlaxoSmithKline and oil majors BP and Shell. The City of London is therefore set up to service vast, established conglomerates.
The perception is that there is more capital available for growth businesses in the US. Further, Wall Street has a wealth of experienced advisers and analysts with the technology expertise needed to gain a superior valuation when founders “cash in” and go for an Initial public offering (IPO).
Venture capitalists complain of a lack of understanding by UK investors of – frequently loss-making – technology ventures. This accusation of a knowledge gap relates not only to professionals but to retail investors too.
In the US, professional services group Deloitte recently noted that 56% of Americans have an equity portfolio they manage. In the UK, this figure is just 14%. There is a much more vibrant investment culture in the US generally – and an interest in stocks and markets is widespread.
The nub of the matter is this… directors of technology companies want to list in a market that understands their – often complex – business, its prospects and its requirement for debt-funded growth to generate future returns.
An IPO only happens once, and a founder wants a listing with the biggest bang for their buck. Company founders worry listing in the UK means the business will not achieve the valuation that they may be able to achieve elsewhere.
So, what is the UK doing about it?
The UK Listings Review, chaired by Lord Hill, was launched in 2020 as part of a government plan to boost the attractiveness of The City to growth companies. The report was published in March 2021 and, in May this year, the Financial Conduct Authority (FCA)
launched a consultation on these proposals and their implications.
The aim is to make it easier and cheaper for companies to list in the UK while still maintaining a high standard of transparency and protection for investors. This has led to concerns in some quarters about “watering down” essential protections when compared with current “premium” listing rules.
The FCA noted its awareness that the proposals will put a greater responsibility – and therefore an increased risk – onto investors in public companies.
It raises the importance of due diligence and shareholder engagement on key transactions.
Is this enough?
Making a London IPO cheaper, and less onerous and allowing the founders who have built up world-class businesses to maintain a degree of control over their company’s future seem sound and sensible. But the perceived lack of a deep well of knowledge around technology investing in the Square Mile – whether real or not – will not be changed by adjusting listings rules overnight. It will take some time.
Any charity with money to invest for the future must ensure their portfolio is diversified globally to have exposure to themes such as artificial intelligence and quantum computing.
Although the UK market offers some solid, long-established and well-understood businesses, the ongoing digital revolution has its major players listed elsewhere.
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