City of London struggles to throw off its ‘Jurassic Park’ image

Apple this week briefly became worth more than entire UK’s benchmark stock index 
City of London struggles to throw off its ‘Jurassic Park’ image

New rules came into force this week aimed at luring more technology firms and growth-oriented companies to list in London.

The City of London is trying to reinvent itself, even as a prominent hedge fund manager derided the UK’s financial centre as a “Jurassic Park” devoid of growth and innovation.

New rules came into force this week aimed at luring more technology firms and growth-oriented companies to list in London. 

Firms issuing dual-class shares will be allowed to list on the top tier of the London market, a move designed to encourage founders to take their companies public while retaining significant stakes.

The changes are a bid to reverse London’s anaemic returns since 2016 and stem the falling number of companies listed in the City, which has left the UK capital at risk of being eclipsed as a global trading centre by Amsterdam.

Since the Brexit referendum in 2016, the UK’s FTSE 100 index has grown by 39% — even when dividends are reinvested — while the S&P 500 has delivered returns of 140%. 

Just 5% of global IPOs take place in London, according to the UK’s markets regulator, the Financial Conduct Authority.

Corporate growth prospects limited

Paul Marshall, chair of hedge fund Marshall Wace, partly blamed London’s local investment culture for the sluggish corporate performance, writing in the Financial Times this week that an obsession with dividends and income-based funds — what he called the UK fund management sector’s “signature dish” — was limiting corporate growth prospects.

“The City of London is in danger of becoming a sort of Jurassic Park where fund managers dedicate themselves to clipping coupons,” Marshall wrote.

Some of the blame for that is down to the composition of the market itself.

London’s blue-chip FTSE 100 index contains a raft of oil, mining, and banking stocks instead of the high-growth, innovation-focused companies that drive US equity returns.

The UK market lags so far behind the US that Apple this week briefly became worth more than entire UK’s benchmark stock index. 

The iPhone-maker had a market capitalisation of $2.7tn (€2.39tn)on Wednesday, just shy of FTSE 100’s $2.74tn (€2.43tn). 

India’s stock market is also on the cusp of overtaking the UK in value.

The move to liberalise London’s listing regime was at least partly motivated by the dearth of tech stocks trading in London. 

Apple, Tesla, Microsoft, Amazon.com and Alphabet make up almost a quarter of the weighting of the S&P 500, while all London’s tech stocks equal 1.4% of the FTSE 100.

Criticism of dual-class share structure

The changes come months after a disappointing market debut for Deliveroo, which failed to win the backing of many of London’s biggest investors and was instead criticised over its dual-class share structure. 

Fintech Wise Plc and DNA-sequencing company Oxford Nanopore Technologies Ltd were also kept out of the top tier of the LSE, and consequently the FTSE benchmark indexes.

UK technology startups — including electric-vehicle manufacturer Arrival, online health startup Babylon Holdings and used car dealer Cazoo Group have also been wooed to list in the US via special purpose acquisition companies, which have yet to take root in London.

The changes to the London listing regime are “a good start”, according to Alasdair Haynes, chief executive officer of Aquis Stock Exchange, a market for small- and medium-cap companies.

“It will help bring new capital and make London more attractive to issuers from other regions, and there are still more rule changes to come that will benefit the UK,” Mr Haynes said. 

The more liquid the market becomes, the more liberal the listings regime, the more growth companies will come here. 

Goldman Sachs Group sees stimulating investor demand as part of the challenge, with two-thirds of the UK equity market owned by non-UK investors.

“There isn’t a culture here of buying stocks, unlike in the US,” said Sharon Bell, European equity strategist at Goldman.

“Trying to bring more tech companies or growth companies to the market and increasing equity supply is encouraging, but you also have to try and increase demand for equity.” 

In the meantime, London-based companies are trading at prices that have proven irresistible to cash-rich US private equity funds. 

A host of companies have faced buyout offers in 2021, including defence manufacturers Ultra Electronics Holdings and Meggitt, grocer Wm Morrison Supermarkets, and investment manager Sanne Group.

The value of deals targeting UK companies stands at $340bn (€301bn) this year, according to data compiled by Bloomberg. 

That’s almost double the amount at this point in 2020 and the highest annual total since 2015.

  • Bloomberg

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