Radical regulatory changes are still needed for London markets to flourish


It is fair to say that the public markets have seen something of a resurgence over the last 18 months or so.

There have been 40 flotations on AIM since the start of 2021 (compared to a total of 42 in 2018 and 10 in 2019) and the secondary markets have been equally busy.

The potential reasons for this have been well documented over various articles and range from the political certainty resulting from the December 2019 election, the rapid fall of markets in March 2020, the return of the retail investor during Covid and large amounts of liquidity being provided by central banks everywhere.

Next to these specific reasons, some commentators have tentatively raised the possibility that this is a paradigm shift from a gradual erosion of public markets over the last 20 years or so, to now being poised to see a rapid expansion of listed corporates.

Others however see recent flotations and PE activity as simply the last hurrah of an asset bubble caused by ever looser monetary policy with the ever-present needle of inflation and rising rates poised to prick it.

So how should we approach things and, if there is to be an end to the open issuance market, when will it come?

Without wanting to deflate the optimism of my industry and the public markets generally, I am afraid I have little optimism that the last 18 months represents a seismic change in the prevailing winds.

To change this, radical changes are needed to regulation and capital structures.

In the UK, all the factors that favour companies remaining private and the barriers to a flotation remain and in some instances are growing.

The size of a company considering floating is becoming larger due to the structure of funds (liquidity being a key issue) and the ever-growing burden of regulation continuing to promote consolidation in the fund management industry.

Furthermore, the business origination arms of PE are far better resourced than brokers, the approach to capital is more flexible off market, the potential rewards for management teams greater and the ongoing scrutiny less.

Next to this the FCA and others have belatedly decided to tackle a listing regime more appropriate to 1984 and have somehow seized on blank cheque companies and dual share structures as the shot in the arm that the London market needs.

The former is largely an irrelevance to the health of the market (albeit some very successful companies have come from that route in London) and somewhat looks like leaping on a bandwagon a bit late considering the soaring SPAC redemptions currently being seen in the US.

The latter is a welcome step in the right direction but needs building on with an elimination of some of the needless bureaucracy that comes with quoted boards, the curtailing of the influence of institutional voting services on board structures and pay and finally the reinstatement of some of the temporary measures that made capital raising easier during the Covid crisis.

All of these are in the hands of regulators (unfettered by European regulations).

It will take the government to finally tackle the uneven playing field of debt in the capital structures of privately backed companies.

If I am not optimistic about the resurgence of public markets without radical change, I am much more so about the general robustness of valuations and the ability of institutional and retail investors to continue to support good stories.

It is true that there have been large amounts of liquidity provided by central government over the last 18 months and that there was a lot of retail activity over the Covid lockdowns.

Next to that, valuations had been cut by a significant percentage in March 2020 and the FTSE 100 has not recovered to pre pandemic levels, albeit there is a strong argument that this relates to its constituent parts as much as underlying valuation robustness.

A better example for the UK would be the FTSE 250 which currently trades on a forward multiple of 25x and a yield of 1.8% which don’t look particularly challenging.

More importantly UK domestic stocks don’t feel as if they are supported by irrational hope or that there are areas of the market where assets are valued on the greater fool theory rather than fundamentals (apart from Bitcoin potentially but that is a whole different debate!).

What is most interesting about current issuance is that it is dominated by companies that the market has not had great exposure to in recent times, such as deep tech companies, high growth B2C businesses and challenger technologies.

There are also many who are only now in a position to execute on strategies that have withstood the tests of Brexit uncertainty and Covid.

As well as inflows, this is also being funded by the steady drumbeat of private equity bidding for more established businesses that can be more easily geared in private and potentially transformed and recycled.

Interestingly the market can keep exposure to these with the sudden trend for PE funds and their managers to list themselves.

Of course, the cycle has not been abolished and this issuance market will come to an end.

The question is what will cause it and will it also cause a wider market sell-off (1987, 2002. 2008).

In the short term a new Covid variant, a UK energy crisis, an unexpected interest rate rises to tackle inflation or further supply side shocks are all good candidates to knock the market and cause nervousness.

The reasons for the eventual turn will be myriad and unfortunately will likely only be clear with hindsight.

What is clear right now is that the public markets remain open and welcoming for high growth businesses seeking funds for expansion and that is a good sign.


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