UK Listings Review
Governance deserves SPACe…
Regulation or its reform usually starts with one or more good reasons for its undertaking. It helps to have a couple of issues to address and a desirable goal to achieve. Ideally a robust case with remedies is presented, leaving little room for the detractors.
With the ongoing scrutiny of UK listing requirements, there are some defined and some implied considerations. Brexit takes credit for the timing, but other catalysts are present. The sectoral shape, growth characteristics and performance of the UK listed universe and the way new issuance and de-listing have reinforced the old economy bias. To be more specific, the scarcity of innovative tech companies listing in London and in turn the lack of presence of their surrounding and beneficial ecosystem are in stark contrast to the situation in the US and other overseas markets.
UK rules also discourage SPAC sponsors alighting in London, given the c$56bn that printed in the US in this category in February alone (FactSet) – the “greenish tinge” of envy is spreading across our shores. The SPAC boom delivers a second risk. It increases the likelihood that innovative private UK business will be taken off market by overseas vehicles, exacerbating the problems, as the FT recently highlighted when citing Tailwind International, a US listing SPAC formed to acquire a European tech asset.
Post-Brexit and under the additional acute pandemic-derived economic pressures, this is not an intellectual exercise but a visceral issue of jobs, capital formation, growth and resultant fiscal take. Economic pressure, an inherent FOMO (fear of missing out) regarding the instant gratification of late cycle aberrations, such as SPAC, and the ongoing European political dog-fight leaves a decision-making backdrop pregnant with elevated risk. The US stock with the symbolic fruit icon having singularly surpassed the market capitalisation of the entire FTSE in Q3 2020 is an emblem of the broader areas of angst. This event might retrospectively prove a prophetic indicator of the unsustainable nature of some aspects of current asset markets and the associated behaviour of participants.
“Environmental factors will not prove supportive for the Sustainability of LSE listing reform; weaker perceived Governance is more likely.”
The inconsistency with the current reassessment process of the rules comes from the review being undertaken against the backdrop of such an extreme focus on ESG considerations. It is incoherent that governance is at risk of being collateral damage, when ESG is so front and centre. Ministers, regulators, banks and other intermediaries, not least of which being the LSE, must undertake a sombre consideration of the longer-term reputational ramifications of any changes. Not unusually, the comments from government and its appointed representatives are pretty superficial, bland and sound-bite in form. The prescribed remedies appear to be to emulate rules in other jurisdictions, deliver a required divergence from the EU and mark-to-market against the US, ahead of the next scheduled instalment on this topic from the FCA in the summer.
“There are ways we can regulate financial services in a smarter way to ensure it is easier for companies to list here.” Michael Gove, December 2020
“We need to encourage more of the growth companies of the future to list here in the UK.” Lord Jonathan Hill, Q1 2020
“The review has more than delivered and I’m keen we move quickly to consult on its recommendations, cementing the UK’s reputation at the front of global financial services.” Rishi Sunak, March 2021
Three main areas for remedial action?
Allowing dual class shares that give more powers to founders
This is commonplace in the US with proponents using the success of Google et al as prima facie evidence of the validity of the approach. The more subjective positive suggested is the way this structure can allow founders to pursue a longer-term growth vision for the business than more usual participation in public markets would allow. The dual class might also negate the risk that founders of growth technology companies specifically are dissuaded from listing, if they must cede too much control in return for the capital provided by public markets. This is at the core of corporate governance and the principal of “one share, one vote”. It risks magnifying avenues for poor treatment of minority investors in listed business, while founders get the benefits of a listing, the cash and the control.
Reducing free float requirements from 25% to 15%
Stated to allow founders to list based on a smaller proportionate sell-down, believing this to be an impediment inherent and specific in the technology sector. The liquidity debate grinds on but, as a generality, a lower genuine free float drives lower liquidity and raises additional corporate governance issues. It might drive a greater number of IPOs, but it will generate additional associated governance and technical issues. These are likely to weaken governance perception and in turn risk dissuading management of quality companies from choosing London as a listing venue.
Liberalising listing rules for special purpose acquisition companies (SPACs)
There are impediments in the UK regulation of SPACs that discourage them from using the UK as a listing location. If the current momentum in this area of issuance continues, addressing the regulations will very likely drive more deal flow in London. This is desirable from a commercial and economic perspective but there are additional considerations. SPAC structures are a product of current liquidity and return dynamics; they are also in part the product of an attempt to circumvent the listing rules that apply to traditional IPO structures. A decision on deregulation must be made in the context of understanding this and accepting the scope for second order negative outcomes.
“If two wrongs don’t make a right, try three…” Laurence J. Peter
Many elements of UK listing regulations require updating and some parts are patently unfit for purpose in the modern world, but for government and regulators, there remains an acute duty of care to maintain and enhance the reputation of London as a listing venue. This supersedes any transitory desire or perceived requirement to “diverge” from European regulation as a post-Brexit point scoring exercise or to grab a few dollars from the SPAC juggernaut as it speeds by (this is part of a cycle and arguably a late-cycle phenomenon). A decade on from the financial crisis that has seen unprecedented asset price inflation, governments and governing bodies require to be adept and exceptionally careful in their actions. Liquidity driven excess against a backdrop of multi-decadal lows in monetary policy rates and financial returns has allowed an unsustainable picture to emerge. Brexit has already been a gargantuan issue, with as yet unclear ultimate ramifications. It would be incrementally sad to see it as the catalyst for erroneous financial market deregulation into the apex of a liquidity driven cross-asset goldrush.
DP Advisory will thoughtfully consider regulation as one of the many relevant aspects in the discussion with you about your corporation’s situational position. All current factors and how they are likely to develop over time are assimilated when considering how to formulate the investment message and distribute it to capital markets participants to best serve the strategic imperatives of management for the optimum outcome for all stakeholders. The right message, through the right channels, to the right people, at the right time. We understand public markets.