Covid-19 crisis exposes longer term challenges facing listed markets

Columnists | Covid-19 | Covid-19 Advice | Financial Services

It is clear that listed markets in the UK, and indeed globally, are under extreme pressure.

Stock markets have plunged as the spread of the coronavirus has resulted in growing uncertainty among investors. Earlier this month, the FTSE 100 recorded its biggest one-day loss since 1987, while markets in North America, Europe and Asia recorded similar double-digit falls.

Governments and Central Banks are now stepping in and implementing measures to try and ease the economic pain.

However, as the coronavirus continues to advance, no sensible strategist or economist would now call the bottom for the world’s stock markets.

Yet even at this moment of acute stress and pain for listed markets, never have they been so needed, not least because they will likely be among the key catalysts for the recovery that will eventually come.

Appetite for going public has been tested

Although the recent steep coronavirus-inspired falls have put a sharp focus on listed markets and their performance, in reality concerns about their future role as efficient allocators of capital in economies were already being voiced.

Various issues have been playing out for some time, including a more uncertain geopolitical backdrop, increasing regulation and compliance and the rising cost of both, as well as the plethora of funding options that have emerged.

They now range from venture capital and venture debt, private equity, state-backed funds, family offices and private debt funds, which are all credible alternatives for companies seeking funding.

Last year more companies left the London Stock Exchange than listed on it. Only 34 companies listed over the course of the year, the lowest number since 2009. Equity raised through flotations fell to £3.7bn, from just over £6bn in 2018.

Indeed, globally, the appetite for new listing was hit by the poor performance of some big-tech stock debuts, such as Uber and the cancellation of WeWork’s IPO. A more recent example is Steinhoff’s decision to postpone the planned IPO of its Poundland subsidiary in the UK, though this is largely due to the extremely unfavourable current market conditions.

For those companies that are already listed, the scrutiny that comes with the territory is proving intrusive. A recent survey from Investor Forum showed that relationships between PLC boards and investors were currently at a low point, with some noting that they felt their companies would be “better off” going private.

The particular area of frustration was what was felt to be excessive pressure from shareholders around corporate issues such as executive pay and climate change, something that affects private companies far less.

Positive case for public markets

However, Investor Forum also noted that it was important to “make a positive case for markets”, and there are range of reasons why public markets will continue to play a key role and why companies should still consider turning to listed markets when they are seeking the scale-up capital to finance their growth.

Indeed, the need for properly functioning public markets has never been greater, as the pace of innovation continues to accelerate and fast-expanding, dynamic growth companies seek capital to scale up, with some potentially becoming the global leaders of tomorrow.

Apple, for instance, listed in 1980 with a market capitalisation of just under $2bn. Until the recent coronavirus-inspired falls, it was valued at over $1trn as the world’s second most valuable company.

Of course Apple could have considered other funding options today and private markets have established themselves as acknowledged rivals to public markets but there is room for both. Take AIM, last year some £4.4bn was raised by growth companies on the market and of all the capital raised on European growth markets last year, around 60% came from AIM.

Almost 2.9 times more capital was raised on AIM in 2019 than on the next largest European Growth Market (First North). Perhaps this performance could be further improved if we could find a way for earlier stage, smaller businesses to be public but with less onerous listing and disclosure requirements similar to the regime introduced by the Jumpstart Our Business Start-Up Act in the US.

Though IPOs on many listed markets are down, primary exchanges also facilitate a significant number of secondary equity offerings. In the US, since 2001 the number of these offerings has outpaced IPOs by a factor of 4-1.

In the UK, on AIM, total money raised through further issues last year was £3.8bn, with £70.3bn raised in secondary equity offerings since AIM was established in 1995.

Public markets also offer a level of liquidity that private markets can’t match, and despite the rise of alternative forms of capital in recent decades, they remain the third favourite route for a business seeking an exit.

Listing offers broader benefits

More broadly, while listing requirements may be onerous and deter some companies, the public scrutiny that businesses going public open themselves up to also raises overall corporate governance standards.

Being obligated to pay more attention to issues such as carbon footprint, gender and equality and executive pay, while it may put extra pressure on executives, is a positive force in our corporate landscape. These are issues for which private companies are far less accountable.

Furthermore, the effect that listing on public markets have on reputation and profile is something that should not be underestimated. For instance, companies on the FTSE 100 are not just some of the largest businesses and employers in the country, they are household names and are looked upon as respected authorities on developments and trends within their respective markets.

Whereas private finance transactions can often be completed with far less profile and visibility, completing an IPO opens a company up to a far wider pool of investors, and can increase its reach of potential clients, stakeholders and customers.

Public markets to retain a key role

The need for properly-functioning public markets has never been greater, not just for the large cap companies in the FTSE 100, but also for the thousands of dynamic growth companies further down the chain need that need sources of capital to help them scale up.

They will also likely play a vital role in ensuring that we do bounce back from the severe coronavirus inspired economic and business setbacks we are currently experiencing.

Investors will undoubtedly have been scarred by their recent experiences and the transparency, governance and regulatory standards that listed markets offer will be key factors in attracting them back to help fund the growth and scale-up businesses that will undoubtedly play a key role in reviving the economy.

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