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Reshaping the Rulebook - April 2021

1 April 2021

Our Chairman, Lorna Tilbian, is a Columnist for Impact, the magazine of the Market Research Society (MRS), the world’s leading research, insight and analytics association.

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The UK listings review was launched in November last year ‘to strengthen the UK’s position as a leading global financial centre’. After consultation, companies, investors and markets eagerly await recommendations in 2021.

With Brexit and the pandemic, it will be critical that we seize the opportunity to reshape our rulebook so that our listings market is conducive to the needs of fast-growing new-economy companies, particularly tech companies, which will create the growth and jobs of the future.

Britain must be as much at the forefront of the fourth industrial revolution as it was of the first, while cementing London’s reputation as a world-class market with high standards of governance, shareholder rights and transparency.

Key areas seen to be making the UK less competitive include free float requirements and dual class share structures (DCSS). A minimum free float requirement of 25% versus 10% in the US leads founders to view a UK listing as requiring the loss of more long-term value. The unwillingness of UK shareholders to accept DCSS has been cited as a major obstacle to attracting fast-growth businesses.

Many founders want to retain control of their businesses while they continue to develop them post-listing, but do not want the perceived lower valuation and liquidity issues of missing out on a premium listing. A founder can be more motivated by the creation of long-term value in the face of short-term opportunities, such as a proposed acquisition early in life by a foreign company, which could lead to the impoverishment of the UK’s listed ecosystem, tech ecosystem, and HMRC. Not all DCSS are alike, and a balanced conversation about types and limits would be welcome.

Many UK founders would like a home listing, to be famous here and give back, but feel pulled to the US by the friendlier environment – where tech founders are feted in Wall Street, Main Street and the media – and higher valuations.

Indeed, valuation is the overarching challenge. For most founders and shareholders contemplating an initial public offering (IPO), the major goal is the highest price, to reward and facilitate the further development of the companies they have built. Until we have a critical mass of businesses with comparable attractive valuations, we need regulations that actively draw them here.

We need ecosystem and, potentially, new FTSE sectors to attract entrepreneurs, bankers, analysts and investors. The media sector was created after the recession in the early 1990s by merging agencies with broadcasting and publishing, respectively plucked out of the leisure and paper, packaging and printing sectors.

The dozen FTSE media players this spawned by 2000, the peak of the dotcom boom, included Sky and WPP. Both mid-90s FTSE constituents had been but glimmers in the eye of the visionary founders in the mid- to late-1980s. Indeed, Sky, 39% founder controlled, was bought by Comcast in 2018 for $39bn, the highest ever exit valuation for a UK media company. Its spectacular success must surely, largely, be because of the influence of the founder and his substantial skin in the game.

This debate is framed as high regulation versus cutting regulation to win IPOs, but it is really about striking the right balance. There will be buy-side challenge to the dilution of shareholder controls that must be recognised and reflected in any proposed changes to the listing rules, but anything that deters companies will be a pyrrhic victory.

Public markets must embrace founder-led businesses with flexibility and celebrate our fastest growth companies, which represents jobs and the future of an independent Britain. Nasdaq must not remain the natural destination for aspirational companies, and we must stave off the emergence of any European exchanges as greater competition over times.

The current exciting pipeline of IPOs could go to the US, trade sale or private equity if we miss this opportunity. London has a natural time and language advantage – we must now create a regulatory advantage to capitalise on the pipeline and attract these companies before it is too late. Carpe diem!