Trying to attract the unicorn IPOs: Will London’s rule changes make the difference?
In December 2021, the UK capital markets regulator, the Financial Conduct Authority (FCA), made changes to its Listing Rules in an attempt to increase the attractiveness for growth companies, including the $1bn+ valuation unicorns, to float on the London market.
The hope of the UK government, the London Stock Exchange (LSE), as well as the FCA, is that the changes will tip the balance towards such growth companies listing in London - rather than in the US - where UK fast-growth companies have historically looked.
In a boost for London, 2021 saw a number of high-profile unicorns come to the UK market including Deliveroo, Wise and Oxford Nanopore. However, some homegrown unicorns still made the choice to launch their Initial Public Offerings (IPOs) in the US including Arrival and Cazoo. Looking ahead, other homegrown unicorns are mooted to be weighing up their options for IPOs in 2022 and beyond.
The FCA has made its move: Changes to its Listing Rules to compete with the US
The first change is that the FCA relaxed the eligibility rules for premium segment listings of companies with Dual-Class Share Structures (DCSS). Such structures are already allowed on other global exchanges with which London competes, but have met resistance in the UK as they run contrary to the “one share, one vote” principle.
Dual-class shares mean that some classes of shareholders, usually the founder of the business, get greater voting rights. However, in updating the Listing Rules, the FCA has limited these enhanced rights to being in relation to a takeover offer of the business and the removal of the founder from the board and with a five year sunset clause.
Secondly, the free float percentage- the amount of shares held in public hands- has been reduced from 25% to 10%.
“It remains to be seen if these changes are enough to make London the preferred option for these fast-growth companies, but it does it no harm to be able to compete on a more level playing field in terms of listing requirements.”
What benefits might fast-growth businesses get from the changes?
The overall aim of the changes is to increase the attractiveness of London’s market to founders of growth businesses, allowing them to raise capital while retaining a greater degree of control of their businesses.
DCSS companies will now be allowed on the Premium Segment of the London Stock Exchange’s main market, which could prove to be key in being an attractive solution for entrepreneurs and growth tech businesses. While this won’t be a relevant aspect for all companies undertaking an IPO in London, of the circa 10% that are fast-growth, founder-led businesses seeking an IPO, it will be a key factor influencing choice of listing venue.
Before the recent changes, companies completing an IPO in London- including those mentioned above- were only eligible for a listing on the Standard Segment. These changes, and corresponding changes made by FTSE Russell to their UK Index Series eligibility, now mean DCSS companies are eligible for FTSE indices which should have a positive impact on share trading liquidity and valuation as, for example, passive trackers and pension funds will buy into the shares.
Will the changes be enough to attract IPOs to London?
Regulatory factors are only one influence on the choice of listing venue. Equally, if not more important, are market and commercial factors including the depth of the investor base, investors’ attitudes and where peers are located. London has a strong position as a global exchange reflecting its access to a large, diverse investor universe and its established legal and regulatory environment.
The changes to the rules may not be enough on their own, but we certainly expect the changes to increase the attractiveness of the UK market and provide a further tailwind for UK IPOs.
The growing pipeline of fast-growth companies looking for capital and considering an IPO certainly provides cause for optimism.
Considering an IPO? Three areas to consider
1. IPO venue analysis
Undertake a comprehensive analysis of the pros and cons of different venues. Importantly this will include commercial and market factors, such as investor base and listing venue of peers, as well regulatory, tax and legal factors. It will also need to consider the respective corporate governance expectations including the interaction with, for example, a DCSS structure.
2. Equity story
Review your equity story to ensure it clearly articulates the value of the business and is underpinned with both financial and non-financial KPIs. Environmental, Social, and Governance (ESG) aspects will need to be embedded in the equity story.
3. People matters
Assess resource capability and consider the need for new and/or increased scale of functions. Typically fast-growth companies require significant investment to both deliver the IPO and then operate as a plc. Existing and future shareholder base and employee share schemes and reward will also need to be considered - the changes to the free float threshold percentage provides more flexibility in this regard.
“A successful IPO starts with careful thought, consideration and planning. I’d encourage any business to undertake a full IPO readiness assessment to help shape their journey and ultimately, make a more successful offering.”
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