View from Vox: London, we have a problem
“The UK markets are not just illiquid, they’re completely broken and closed,” the damning assessment of the London market by Ali Mortazavi, chief executive of Aim-listed biotech (), which this week became the latest company to announce plans to delist. “My overriding feeling in delisting $etx is one of sadness and great worry.”
Mr Mortazavi is not alone in his concerns over the state of London’s market, unsurprising given the mass exodus of companies seen in recent months. By July 2023, a steady stream of de-listings and takeovers alongside a hiatus of IPOs had seen the number of UK listed companies slide to 1,900, a decline that has continued in 2024 and leaves the market with 40% fewer constituents than its 2007 heyday.
There has been much head-scratching about this so-called de-equitisation – what’s causing it and what to do about it? But the overarching issue, it seems, is a simple one: a lack of interest in UK equities that has seen 34 months of net outflows and left the UK the cheapest major market in the world on a PE basis.
Unsurprisingly, that’s making companies think twice about the high of costs of being a listed company – around £300k to come to market and £100k a year to maintain a listing. As () – another biotech that recently announced plans to hang up its listing – neatly encapsulated it in a statement this week, “as a private company we can access a broader universe of specialty investors and, accordingly, a larger quantum of future funding required to execute our strategy.” In short, why jump the financial and regulatory hurdles of public market life when growth capital can be easily found elsewhere?
The rise of the private capital Redx is targeting has been spectacular and is at least partly responsible for the malaise of public markets. Private equity and unlisted trade buyers – like Shurgard Self Storage which this week announced plans to buy listed rival () at a 16% premium - have been highly active buyers of listed companies whose value has in many cases been decimated by the outflows from London.
But as Richard Hickman of private equity investor () recently told me, there are also deep pools of capital available to support companies at all stages of their lifecycle, which means many need never to come to market at all. “The pull factor of the public markets for operating companies I think is weakened because there are these alternative sources of funding”, he says. “Private equity and private markets in general have captured many of the growth opportunities that perhaps 20 or 30 years ago would have been available as relatively early stage to investors in the public market.”
Yet even private equity investors haven’t been immune from the listing hiatus, especially those vehicles whose own shares are listed on London’s markets. Private equity investment companies shares are still trading at massive discounts to the value of their assets’ last reported value, even those like HarbourVest and () where the managers have a track record of valuing their investments conservatively. That the listed asset class which should be the main beneficiary of de-equitisation is also suffering, it’s clear that the malaise is more than just a distaste for UK companies.
Indeed, one theory that makes most sense of the UK market’s problem is the headlong rush into US tech, and specifically the ‘Magnificent 7’ largest companies that dominate global indices. Put simply, the fear of missing out on the returns they’ve generated has sucked capital away from everywhere else – not so much a distaste for the UK but a FOMO rebalancing towards big tech.
Which means for all the hand wringing and convoluted proposals to fix it by those overseeing the UK investment markets, this is a problem that mean reversion should take care of. If history is any guide, the big can’t keep getting big forever – especially with the S&P trading way above its 200-day moving average and in overbought territory - and nor is the UK discount likely to persist indefinitely. US market concentration fell sharply in the 1960s, as policymakers took aim at the oligopolies that dominated that era, and is likely to do so again when regulators work out how to deal with the natural monopolies big tech have become.
That’s not to say that there isn’t still much that can be done to make the UK market much more friendly to those on them and those investing in them, and boost UK ownership of equities from the current lowly level (9% of UK households own shares, versus 30% in the US). More tax breaks such as the introduction of a British ISA, or the rebundling of broker research and trading commission, or changes to listing rules are among some of the ideas recently floated and surely worth a try.
But while it is often bemoaned that the UK doesn’t have an Apple (AAPL) or Microsoft (MSFT), London’s markets are home to many, both innovative or established smaller companies that are simply looking far too cheap. Private equity has already noticed, and it is surely only a matter of time before private investors do, too.
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