A more comprehensive slate of reforms are needed if London is to arrest its decline as a major global IPO destination, market observers said.

The dearth of global IPO activity in 2023 — amid rising rates and market volatility — hit London particularly hard, with the amount raised from UK listings falling to its lowest level since 2013, S&P Global Market Intelligence data shows. Additionally, the number of new UK listings nearly halved from an already weak 2022.

The city's allure as a capital markets hub has been called into question after several companies, including Arm Holdings PLC — a Cambridge-based chipmaker deemed of strategic importance for the UK — snubbed London to float in the US. The recent slump is part of a longer-term structural decline of the UK equity market that requires measures beyond ongoing regulatory reforms, industry sources said.

"We are 80% of the way there in addressing 20% of the problem," said William Wright, managing director of capital markets-focused think tank New Financial.

Proposed changes to the UK listings regime, equity research rules, taxation on UK investment funds and derivatives trading disclosures would tackle only a fraction of the fundamental structural challenges facing the UK equity market, Wright said. A comprehensive solution would require broader changes, including boosting the share of pension fund, insurance company and retail investments in UK equities, which are at record lows, a New Financial analysis shows.

The drop-off of listings in London has been more severe than the IPO drought experienced globally. The number of UK deals dropped 79% from the highs of 2021, when markets boomed thanks to a wave of special purpose acquisition vehicle listings and increased trading activity during COVID-19. This compared to a 70% drop in the US and a 48% drop in global transactions, Market Intelligence data shows. The total amount offered has collapsed 95% since 2021, compared to an 88% drop in the US and an 82% drop in the rest of the world.

There is a clear decline in the value and size of the UK equity market compared to global peers over the past two decades, New Financial research shows. The UK's total market capitalization-to-GDP ratio — a measure used to gauge the current value of an equity market against its historical average — fell to 94% from 104% between 2002 and 2022. All other comparable equity markets, including the US, France, Switzerland, Australia, Canada and Japan, have gained in value by the same measure and over the same period, the research shows.

Between 2012 and 2022, the value of UK-listed companies, adjusted for inflation, remained unchanged while the value of US-listed companies increased 67%, New Financial estimates show. Stocks listed in the UK's FTSE 100 index trade at a 46% discount to top stocks in the S&P 500 and at a smaller discount to shares elsewhere in Europe, the data shows.

A key driver of the valuation gap is an exodus of companies from the market. Delistings surpassed new listings in 17 of the 25 years from 1997 to 2022, New Financial found. Since 2012, an average of 125 companies have left the UK stock market every year, mainly due to acquisitions by private or overseas firms, the think tank said. Irish building materials supplier CRH PLC and UK-based plumbing products supplier Ferguson PLC were among several companies to switch their primary listing to New York from London in recent years.

This "de-equitization" of the UK market — most prevalent in the small-cap, midcap and growth sectors — creates a vicious circle whereby the shrinking pool of listed stocks reduces liquidity and depresses valuations, resulting in less investor money available to back new listings, UK broker Peel Hunt said in capital market-focused research published in late 2023.

Drastic action

Proposed government reforms would bring positive and necessary changes but "are not enough on their own to halt and reverse the de-equitization of the UK market," Peel Hunt said. The broker cited tax reforms and further measures to boost institutional and retail investor participation in the UK equity market as key to improving the outlook.

With about £5 trillion in pension and insurance assets, and roughly £1 trillion of retail investment assets, the UK has the second largest pool of long-term capital globally after the US, New Financial said. Yet most of this vast source of funding is currently unavailable to listed companies.

Pension fund investments in UK-listed equities have collapsed to 6% from 39% in the decade from 2002 to 2021, "sucking a huge amount of natural demand out of the UK equity market," New Financial said. In the same period, insurers' investments in UK equities plunged to 5% from 27% and domestic retail investors' allocation to UK equities nearly halved to 18% from 32%.

Reversing those structural changes in the market will take years and require a host of reforms, most notably a shift in institutional and retail investors' mindset towards risk, Wright said.

"Cultural attitudes towards wealth [and equity investments] are very different in Europe compared to the US," he noted.

Bleak outlook

While London was historically the listing venue of choice for companies across Europe, more and more businesses are now looking to New York. European company IPOs in the US amassed $6.72 billion in 2023, compared to $1.1 billion for all UK IPOs, Market Intelligence data shows.

Better valuations and greater availability of institutional investor funding in the US are driving European companies across the Atlantic, said Meziane Lasfer, a finance professor at London-based Bayes Business School. Post-Brexit rules make it harder for EU-based investors to back UK-listed companies, which makes New York more attractive for EU groups looking to list, Wright said.

UK-headquartered shoemaker Birkenstock Holding PLC, which largely operates in Germany and is backed by French luxury firm LVMH, chose a US listing in October 2023. Europe's largest tour operator Tui AG, which has a dual listing in its home German market and the UK, said in December it was looking to delist from London as a big chunk of trading in its shares had moved to Frankfurt over the last four years.

The fragmentation of capital markets within Europe means London remains the continent's largest financial center, said Ronan O'Kelly, head of Oliver Wyman's European corporate and institutional banking practice.

London has the critical mass to be a successful listings hub, thanks in part to the "vibrant ecosystem" of investors and advisers, though the city "needs to work hard to protect its position, particularly in light of Brexit," said O'Kelly.