ARM’s round-trip after a 25% pop on its first day of trading is not a PR disaster for New York. No one will be suggesting that the weakening share price is Nasdaq’s fault or that tech companies considering an IPO should go to other jurisdictions. Yet that’s the kind of accusation that would probably have been leveled at London had Arm listed on its domestic exchange and the shares suffered the same fate.
London clearly has a problem attracting new technology listings — and even retaining existing companies regardless of sector. To fix this, the financial regulator has moved to ease some of the listing rules. Some investors have bemoaned a weakening of gold-plated governance. Yet the idea underpinning these reforms makes sense: There’s no point having a theoretically perfect regime if in practice IPO candidates then go to US or European exchanges with less stringent standards.
Take dual-class share structures. These have their flaws in cementing founder control, and have traditionally been a bar to qualifying for the UK’s most prestigious listing category. Should investors not be allowed to decide for themselves whether to invest in companies that use them?
But London’s principal difficulty is not the market rulebook but the shortage of domestic demand for equities, especially from pension funds. Regulatory and accounting changes have driven a wholesale shift in asset allocation in favor of supposedly lower-risk bonds over the last two decades. Not only is there less UK investment in stocks, but a bigger chunk of the allocation is going to passive funds. UK shares now have largely international owners. If these investors’ goal is no more than geographical diversification, they aren’t going to be very engaged.
Consider the recent news from Melrose Industries Plc. The acquisition vehicle was founded in 2003 to buy underperforming companies, and repeatedly raised cash on the London stock market to do so. One of its founders told Bloomberg News earlier this month that a successor vehicle could use private capital instead. No wonder. The cash just isn’t there in the UK listed sector.
Moreover, Christer Gardell, founder of activist Cevian Capital AB, has talked up the opportunity to boost companies’ valuations by getting them to migrate their listing. Gardell didn’t pinpoint the UK specifically — but it’s clearly the prime hunting ground for his targets.
Reform to stimulate UK equity investment has barely gotten started. The government is consulting on whether to expand the national lifeboat for the pension plans of failing companies into something more ambitious – a superfund that would see a higher proportion of pension assets invested in equities in general, including UK stocks.
The tradeoffs here are less easy to weigh than those surrounding the listing rules. But the principal of pension fund consolidation makes sense – large funds are more efficient, can afford more professional investment expertise and may be better able to invest in riskier, but higher return assets. The tougher political battle will be to modernize an overarching framework which seems absolutely averse to risk.
Finally, there’s the UK’s attitude to corporate governance, and pay in particular. The current UK governance code is unwieldy — some have called for its abolition. Above all, skilled managers can earn more running US companies or working in private equity than they can leading a FTSE 100 firm. Julia Hoggett, who runs the London Stock Exchange, dared to put her head above the parapet and draw attention to this back in May. This will be another bitter debate, but it needs to be had.
Two other US IPOs, Maplebear Inc. (Instacart) and Klaviyo Inc., dipped below or close to their offer prices this week. But this isn’t a zero sum game. Volatile IPOs in New York make the environment harder for new stock sales everywhere.
David Schwimmer, the boss of the London Stock Exchange’s parent company, told the Financial Time the bad-mouthing of London as a financial center was “clickbait” and unjustified. London indeed has its strengths, but its challenges are real. Perhaps the loss of ARM to New York isn’t such a cause for UK regret after all. That shouldn’t dent the ambition to make London more attractive for the next aspiring tech IPO.
More From Bloomberg Opinion:
• The Golden Days of Buy-to-Let in the UK Are Over: Merryn Somerset Webb
• Burberry Gets Its Confidence Back in London: Andrea Felsted
• Billionaire Ratcliffe’s Man Utd Cash Fountain Is Sputtering: Chris Bryant
(The parent company of Bloomberg News competes with London Stock Exchange Group plc’s Refinitiv in providing financial news, data and information.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
More stories like this are available on bloomberg.com/opinion
