Will London Adapt to Remain the Top Choice for Startup IPOs?

February 12, 2024

If a company is gaining popularity and wants to grow and develop, it needs to attract investment. One popular option is listing on the stock exchange. A company can go public and sell its shares on the stock exchange, which will give it an increase in capital and, thus, a powerful financial resource. According to Ledgy research, 72% of British tech companies prefer to list on the London Stock Exchange (LSE). 

However, now there is an active discussion about whether the LSE is a good choice or whether it is better to go to an alternative like the Nasdaq. Let’s explore what is happening in the world of publicly traded companies and shares.

Why Do UK Tech Firms Prefer Listing in London?

The majority of UK tech companies prefer a London listing to an IPO on a foreign stock exchange. This tendency may seem unsurprising. The desire of many UK firms, both startups and large-scale companies, to go public results in an increased number of listings. Many of them prefer to stay in their own territory, as London is the world’s tech hub, where new tech companies are always welcomed, and there is no need to understand international regulations.

Moreover, the UK Financial Conduct Authority (FCA) has proposed reforms to rules in the country to encourage the listing of more diverse companies and enhance opportunities for investors. This may also lead to a preference for a local listing.

Why May Local Listing Be Concerning?

Many want to bypass the complexities of listing on international exchanges, get government support, and join hundreds of other publicly traded tech companies. However, the reality does not always match the expectations of companies.

The decision by chip manufacturer ARM, a UK technology success story, to list on the Nasdaq exchange in 2023 has sparked considerable debate about the attractiveness of the London market and its suitability for technology companies. They say that local institutional investors are actually cautious about investing in technology-driven companies. Firms are getting more numerous, and the risks in the tech industry are high, so an asset-saturated financial market can discourage large investors from supporting initiatives. 

IPO results can be less than spectacular. Deliveroo’s share price fell 26% after it debuted on the London Stock Exchange in 2021. The Hut Group (THG) has had trouble maintaining its market value since going public a year earlier. The initial preference for a UK company to list in the country does not always translate into action, especially given the challenges of retaining value post-IPO.

Optimism for the Future

While there are some concerns and even examples of unfavourable listings, Ledgy’s research suggests that London remains attractive. In 2023, UK startup investment hit $15 billion due to US backers. Thanks to this, Britain maintained its status as the top European destination for venture capital.

According to a report by HSBC Innovation Banking and Dealroom, US investors overtook their domestic counterparts as the largest source of funding for UK startups in the third quarter of 2023, adding around 37% of venture capital for UK business development. UK startups have raised about $15 billion — about as much as those in France and Germany combined, the study said.

The UK government is also trying to encourage UK investment to help boost the economy. It is meeting and contracting with major pension funds to increase their investment in high-growth companies, which could raise £50 billion. The report states that the UK attracted $18 billion in startup investment in 2023. That’s half the amount invested in 2022 and about a third of the record 2021 amount.

Read also: Why Is the UK a Dominant Fintech Hub?

The IPO Scene in 2023

There is currently a lull in the IPO scene, with Ledgy reporting that 2023 saw the fewest offerings on the LSE since 2008-2009. In addition, 21% of the 2,500 companies surveyed, including UK and European companies, have abandoned their IPO plans. 

On the contrary, Yoko Spirig, co-founder and CEO of Ledgy, expects that the LSE may become more appealing to local startups. There are several reasons why London may remain the best choice for these companies.

Domestic Trade as a Reason for Listing on the LSE

The CEO of Ledgy believes that companies focused on domestic trading are more likely to list locally. He highlights that the current climate for attracting venture capital on global exchanges is difficult, which forces companies to scale back expansion plans and could make local IPOs more attractive. Additionally, the evolution of the European investment landscape, with an increasing number of funds focused on Britain and Europe, may support companies aiming to go public in the long term.

Efforts to Increase Investment

The government, of course, is not left behind when it comes to the financial markets. As a critical and influential player, the government is contracting with companies and funds to raise more capital for startups and support the development of technology in the country. Most notable is the agreement made with pension funds, which are expected to allocate 5% of their investments to listed technology companies by 2030.

However, Hubert Fenwick, CEO of Selina Finance, notes the low proportion of retail investors in the UK and believes that innovative companies need to increasingly educate their audiences about the importance of investing in stocks. That way, they can get more capital.

Regulatory updates and potential tax incentives could also be good measures that make London a more attractive place to list and encourage wider investment.

Options Beyond Public Markets

While efforts are being made to simplify the listing process, companies are also looking at other exit strategies. The most viable are mergers and acquisitions and private equity.

  • M&A refers to the processes where the acquiring company gets all the assets, liabilities, and obligations of the target company. They are associated with a meticulous and comprehensive groundwork phase, extensive research, and legal considerations. 
  • Private equity involves investing in unlisted companies with the aim of generating a return, usually after at least five years. The private equity market in Europe offers growth opportunities without the complexities of a public listing.

What Will 2024 Bring for Investors?

After two years of decline, venture capital investment will level out in 2024. As a result of booming fundraising in 2021 and 2022, the best companies will have no problem raising capital at premium valuations. In contrast, companies running out of cash and without signs of profitability will face lower valuations.

Fuel Venture Capital reported that in just 12 months, their portfolio companies have made significant gains in many metrics, from growth to economics to profitability. On the investment side, their experience over many economic cycles has shown that now is the best time to invest in venture capital. Taking advantage of the investor-friendly environment, Fuel continues to make opportunistic investments, especially in superior companies.

The outlook for investors in the UK in 2024 is characterised by cautious optimism and a focus on opportunities in the stock market. There is a belief that the UK stock market remains a “bargain,” with undervalued companies offering potential for investment. While volatility is expected to continue, some see this as an opportunity to buy stocks with attractive dividends and strong balance sheets. The new year is expected to bring an increase in total VC fundraising, making it stronger than in 2023 and comparable with 2020 figures. 

Will the FinTech Ride Keep Going?

It’s likely that new IPOs will get more attention from investors. On the technology side, tech companies will leverage the emergence of open banking, embedded FinTech, and generative artificial intelligence to innovate and thrive. From a business perspective, the defining factors in 2024 will be scalability and robust unit economics, even without rapid growth.

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