In her latest column, Sam Smith – Chief Executive of finnCap – shares her views on what we can expect to see in public markets in the year ahead.
UK equity capital markets have endured a difficult last twelve months, and have done so rather resiliently. Bouncing back from a longer-term decline which was exacerbated by the pandemic, public markets are expected to make up for lost time in the early months of 2021. This positive forecast provides an opportunity in the City, where hopes of remaining Europe’s premier location for IPOs remain very much alive.
Weathering the storm
A new year brings renewed optimism for the UK’s equity capital markets, with London expecting to see a recovery in the number of companies looking to float. This follows a year in which companies collectively raised $7.4bn from London IPOs, the vast majority of this total being raised in the last quarter after a quiet first eight months in a Covid-stricken 2020.
Last year’s pandemic-induced falls intensified scrutiny on listed markets and their performance, but concerns about their efficiency as allocators of capital were already being raised. Already hindered by the rising costs of regulation and compliance, an increasingly uncertain geopolitical backdrop was hardly conducive to encouraging optimism. Meanwhile, various alternative funding options continued to gain credibility and popularity, from venture capital and venture debt to private equity, private debt funds, state-backed funds, and family offices.
Appetite for new listings was therefore at a low ebb even before the pandemic. Only 34 companies listed on the London Stock Exchange in 2019, the lowest number since 2009, and lower even than the number of companies which delisted in the same year. Globally, optimism took a further hit as big-tech stocks such as Uber underwhelmed on their debuts, while others such as WeWork cancelled their IPOs altogether.
A happy new year?
However, a resurgence of activity in the final quarter of 2020 breathed new positivity into public markets. While the $7.4bn figure owed much to a small collection of large IPOs such as The Hut Group’s $2.4bn deal, this was certainly an improvement on the disappointing performances and postponements of recent big-name floats.
There was a collective sigh of relief at the end of 2020, which ended up being more positive than many had come to expect. While the first three quarters of the year were effectively lost to Covid-19, listing activity began to recover as the equity market rebounded from March lows. Now, pandemic-proof tech companies are expected to lead another wave of the bounce-back in early 2021.
And there is particular promise on London’s junior stock market, which came of age in its 25th year. Indeed, the AIM All-Share Index closed the year 20.7% higher than where it began, and this run has continued into the new year to take its gains above 22% for the past twelve months. On 13th January, it hit its highest level since 2007.
Pros of public markets
In light of their recent upturn in fortunes, it is worth reiterating the positive case for public markets. And with public markets still the third-favourite route for businesses seeking an exit, these advantages evidently retain an attraction over other forms of capital.
Firstly, despite doubts raised by the proliferation of alternative funding sources, listed markets remain a vital resource for companies seeking scale-up capital to finance their growth. Their importance will endure as growth companies look to follow in the footsteps of firms such as Apple, which listed in 1980 with a market capitalisation of just under $2bn, and which was valued at more than $1trn on the eve of the pandemic.
Moreover, the continued popularity of secondary equity offerings speaks to the ongoing vitality of listed markets even while IPOs have been in abeyance. On AIM, for example, £3.8bn was raised through further issues last year alone, with more than £70bn raised in secondary equity offerings since AIM was established in 1995.
Public markets also offer a level of liquidity which private markets cannot match and, perhaps even more importantly, they provide an unparalleled platform for profile-building which is invaluable for companies looking to float. For instance, FTSE 100 firms are not just some of the UK’s largest businesses, they are also household names and authoritative voices on trends within their respective markets. Whereas private transactions offer less visibility, IPOs provide a far wider pool of investors and potential customers.
With this higher profile comes a level of scrutiny which may be off-putting for some executives, but nowadays it is vital for companies to hold themselves accountable to increasingly rigorous regulatory standards. ESG issues from carbon emissions to equal opportunities already figure highly on stakeholders’ agendas, and this trend will only gather momentum in the wake of the pandemic. Public offerings are therefore more conducive to highlighting the key ingredient of a corporate conscience.
Seizing the opportunity
So, there are plenty of reasons to keep the faith with listed markets in 2021 and beyond. However, this does not mean that these markets, particularly those in the UK, can afford to rest on their laurels.
British biotech firm Immunocore’s recent decision to float on the Nasdaq has underlined the importance of reinforcing the UK’s appeal to companies looking to go public. With this in mind, it is encouraging to hear that the government is receptive to reforms designed to reduce demands made of companies hoping to list.
Under current rules, startups must sell at least 25% of their company in a listing, which may discourage owners concerned about selling too much of their business, while present restrictions on the use of dual-class share structures have prompted firms such as Just Eat to shift shares and liquidity abroad in recent times.
This matters because, post-Brexit, the UK faces additional competition from EU listed markets. German markets edged the UK in terms of aggregate IPO value in 2018, and Amsterdam is now emerging as a strong competitor, having wooed Polish ecommerce group InPost at London’s expense earlier this month.
At the very least, London must stave off its EU competition, as its status as the prime location for international companies looking to list in Europe may reduce envious glances towards Wall Street and China – which attracted $160bn and $54bn of IPO activity respectively in 2020.
Thankfully, the wind appears to be blowing in the right direction. And with sound policymaking, UK public markets will spend more time looking up than over their shoulder in the next twelve months.
Optimism and opportunity
After the first three quarters of 2020 presented something of an acid test, public markets have emerged from their crucible with their credibility intact. Despite the growth of alternatives, IPOs retain their appeal for companies seeking growth capital, largely thanks to the greater liquidity and higher profile which are often thrown into the bargain. UK markets should therefore consider concentrating less on alternative funds and more on competition from abroad, with regulations threatening to drive IPO activity into the arms of our neighbours. Nevertheless, the foundations for further growth in 2021 remain strong overall.