HAMISH MCRAE: City of London bids on the giants of tomorrow

HAMISH MCRAE: City bids on tomorrow’s giants as FCA eases listing requirements for new companies going public

The battle has begun. As of Friday, the Financial Conduct Authority relaxed listing requirements for new companies seeking to list on the London Stock Exchange.

One of the changes is that they only need to float 10 percent of their capital upfront against 25 percent, and dual-class shares that give founders a larger share of the voting rights will be allowed in some cases.

The changes are the result of two assessments commissioned by the government, which aim to regain some of the business London has lost to New York and to a lesser extent to European centers such as Amsterdam.

A new dawn: The Financial Conduct Authority has relaxed listing requirements for new companies seeking to list on the London Stock Exchange

One of the reviews focused on the so-called fintech sector – financial technology – while the other looked more broadly at ways in which London could increase its competitiveness, particularly vis-à-vis Europe.

This change in the list is just one element of the mix. Others have been put forward – such as making it easier for foreign financial workers to obtain short-term visas – that are probably just as important for bringing business to London.

This all makes a lot of sense, even if that company is highly speculative. Take the SPACs – special purpose takeover companies. These are the ‘blank check’ companies, where a company is listed as a means of taking over incumbents, without specifying what the objectives could be.

Coincidentally, I think it’s crazy to raise money on this basis. During the South Sea Bubble in 1720, a company was launched to carry out ‘a venture of great advantage, but no one knows what it is’. It got its capital in an afternoon. The story is cited as an extreme example of speculative mania and it was. But if investors are willing to stumble upon SPACs, it’s certainly not the role of a financial center to try and stop them. They will go elsewhere.

This year, 13 SPACs have been launched in Amsterdam, backed by major investors such as Bernard Arnault, founder of LVMH and Europe’s richest person. There has only been one SPAC in London.

This is important. From a financial services perspective, the goal is to bring business to London that would have gone elsewhere. But look at this from the point of view of UK-based investors. Is there easy enough access to high-tech companies with high growth potential?

There has been a wave of IPOs in London since the start of the year – nearly 100 compared to 29 last year.

The results? Well, they were a mixed bag. For example, Wise, a foreign exchange transfer company, is currently 13 percent lower than its share price at the opening of its IPO in July. Deliveroo has also fallen by a similar amount. On the other hand, even though it was at its peak a month ago, cybersecurity firm Darktrace is still up more than a third from its April launch. Oxford Nanopore is up more than 10 percent since its IPO in late September.

Mind you, follow a little further back – to The Hut Group which launched 15 months ago – and it’s nearly three-quarters lower than its opening price.

All in all, it might have been better for investors this year to skip new issuance and possibly put extra cash into the US high-tech giants. Alphabet, the parent company of Google, is up 65 percent this year, Microsoft more than 50 percent and Apple more than 25 percent.

I also worry that by the time a company hits the market, most of the early profits have been taken away by their private equity and venture capital financiers. That’s fine for investors with access to those lenders. It is also fine for wealthy families with private offices that can invest directly in start-ups.

But not so good for small investors looking to play their part in supporting small businesses that may well grow into large ones. Relaxing listing requirements rules in London will not solve this broader problem.

It’s not possible. On the other hand, to the extent that it makes the UK a more attractive place to raise capital, it will encourage more start-ups, especially high-tech. That is good for the economy.

The job of the professionals is to help investors filter the winners out of the duds. At least these are real businesses and not just cybercurrencies. And a small number of these companies that float now will eventually become the giants of the future.