Companies floating in London have raised just $1bn (£790m) this year – down by 9pc on last year, according to data compiled by Bloomberg. They’re $40bn behind the fundraising clout of the US, which ranked first in the world.
The lowly haul pushed Britain down by four spots in the worldwide league table for fundraising from initial public offerings (IPOs) to 20th place.
London fell behind Oman, even though its overall stock market is 1pc the size of Britain’s. Malaysia and Luxembourg have also risen above London, while Britain’s stock market also trails behind Australia, Poland and Saudi Arabia.
The London Stock Exchange disputes that it is falling behind, pointing out that it remains the third largest venue globally for capital raised, a broader measure that includes how much money companies already listed on the venue have raised from their investors.
However, the Bloomberg figures highlight the stark challenges facing Britain’s stock market and will increase pressure on the Chancellor to do more to revive the bedrock of the UK financial system.
Founded in 1801, the London Stock Exchange once vied with New York and Hong Kong for global pre-eminence.
A decade ago, London ranked as the world’s third busiest exchange for IPOs behind New York and China, according to Dealogic’s figures. Today it has dropped to 18th spot in Dealogic’s table.
Not only are new companies not joining the market, but those already listed are also leaving. On Monday, FTSE 100 rental giant Ashtead became the latest to turn its back on London, saying it would switch its listing to New York.
It joins the likes of building materials group CRH, travel agent TUI, packaging supplier Smurfit Kappa and betting group Flutter Entertainment – all of which quit London or adopted secondary listings elsewhere.
Meanwhile, takeovers are also picking off London’s best companies. The number of companies exiting the market this year through takeovers has risen to a 14-year high – with Royal Mail, Hargreaves Lansdown, Virgin Money, Direct Line and Britvic all leaving or set to exit the market.
The combination of a slowdown in new listings and an exodus of existing companies has led to what commentators have dubbed a “doom loop” for the market.
Goldman Sachs recently said the UK market was shrinking at its fastest pace in history because of the mergers and acquisitions (M&A) boom.
As the market shrinks, it becomes harder and harder for brokers and market executives to convince management teams to list their businesses in London.
In a rare dose of good news, France’s Canal+, the studio behind the Paddington films, is set to join the London Stock Exchange rather than its home market when it is spun out by owner Vivendi. However, it does not count as an IPO because no new shares will be offered to investors.
Fund managers who in the past would be keen to invest in the London stock market now prefer the US, which is home to top performing companies like Nvidia and Apple.
“The reason the London market is so moribund is because fund managers are chasing performance, and performance is in the US, so they allocate to the US,” says Simon French from City stockbroker Panmure Liberum.
“Companies coming to the market get a lower value so they don’t bother. Underperformance of UK equities leads to under-allocation [of investor money] and less liquid markets – so you get a doom loop.”
Dame Julia Hoggett, head of the London Stock Exchange, has been at the forefront of efforts to revive the market. She chairs the Capital Markets Industry Taskforce, a body composed of banks and fund managers that campaigns to revive the stock market.
Dame Julia Hoggett Dame, head of the LSEG, is actively campaigning to revive the stock market - Hollie Adams/Bloomberg
Yet within industry, there is increasingly a feeling that only bolder Government policy can solve the crisis.
Reeves and her City minister Tulip Siddiq have backed a package of capital market reforms introduced by the last government intended to revive activity.
These include a loosening of listing rules to make it less burdensome to float by, giving more power to boardrooms on issues like raising capital. However, so far, there is little sign the reforms have made an impact.
Although the decline of the markets pre-dates Labour, there have been calls for bolder policies from the new Government to arrest the slide.
The Chancellor has been looking at how UK pensions funds, which have billions of pounds at their disposal, can help address the problem.
According to Reeves’s recent pension review, “the Government is concerned by the evidence that UK pension funds are investing significantly less in the domestic economy than overseas counterparts”.
She has already spelled out plans to force the £360bn of local council pension schemes to merge their investment portfolios into megafunds as well as encourage them to invest more in British infrastructure.
But to date, investment into the UK stock market has been at the fringes of the Chancellor’s policy – despite signs that investing more pension cash in London would boost liquidity and potentially boost valuations and help attract new listings.
Pension funds need to be ‘strong-armed’
Is it time for Ms Reeves to force more pension funds to own UK stocks?
“UK pensions need to be encouraged through tax changes or strong-armed by saying ‘we want 25pc invested in the UK’,” says French.
“It’s controversial because they are going to be taking on some vested interests in the pension industry but they have to if they don’t want London to remain a backwater.”
Fund managers are less optimistic that pension funds – or other solutions – can really reverse London’s decline. They lay the blame not with home-grown issues but the acceleration of America’s multi-trillion-dollar capital markets.
Friction between Wall Street and London
Historically, London and New York’s stock markets had grown in tandem because of the shared language, small time-zone gap and the fact that the financial plumbing underpinned to both capital markets was closely joined up.
However, in recent years the way New York’s financial ecosystem has evolved has left the London stock market for dust.
In the US, electronic trading now dominates the flow of shares being bought and sold, with new firms like Jane Street Capital and Citadel Securities displacing the banks. Exchange traded funds (ETFs), which often mirror major markets, are also a more popular way to own shares, rather than buying individual company stock directly.
In the UK, buying a less liquid FTSE 350 stock involves speaking to perhaps two or three brokers – such as Winterfloods, Shore Capital or Peel Hunt – who handle smaller companies.
This discrepancy means that Wall Street and the City of London no longer speak to each other technologically, according to one investor. The net effect is that billions of dollars of American money that could flow into the UK simply doesn’t because of the friction between the two systems.
Others point to more pragmatic reasons for the lack of US money flowing to London.
“US fund managers might want to buy more of the UK but they say ‘why should we buy your market if you [UK investors]don’t even bother to buy your own market’,” says French.
“If they saw signs that UK pensions were rotating [by moving money into the London stock market], they would buy a lot more because they would chase the performance.”
A Treasury spokesman said: “Recent IPOs and listing announcements by high-growth companies like Raspberry Pi and Canal+ demonstrate confidence in our capital markets and there is more we can do to attract exciting businesses to the UK.
“That’s why we are creating pension megafunds to unlock billions of pounds of potential investment for businesses, as well as backing the largest overhaul of UK listings rules in decades.”
An LSEG spokesman said: “The UK market remains the third largest in the world by capital raised year to date and we are encouraged by the pipeline of companies looking to list on the London Stock Exchange.
“The UK capital markets are undergoing the most dynamic set of reforms anywhere in the world right now.”
