Ideas Farm: The wrong Hill to die on

A few months ago, just a quarter of Finns wanted to join Nato. This past week, with the backing of the ruling Social Democrat party and 76 per cent of the population, the Nordic nation announced its intention to join the military alliance. After seven decades of neutrality, Russia’s invasion of Ukraine upended one of the country’s most important notions about itself.

Assumptions quickly form, spread, and harden. Then the world changes, and they crumble.

A year ago, the City coalesced around the idea that the UK’s listings regime needed an overhaul. For the country’s bourses to remain relevant post-Brexit, and with a globe of investors and corporations to pitch to, a capital markets “reawakening” was mooted. The government gave its full support.

What emerged from the UK Listing Review, chaired by Lord Hill, looked more like a series of tweaks rather than root and branch change.

But it was clear that the goal of the exercise was to foster in London’s equity markets the kind of entrepreneurial zeal and tech-led innovation that had led to the S&P 500’s decade-long trouncing of its hobbled British blue-chip cousin, the FTSE 100. A high concentration of ‘pandemic winners’ on the boards of the NYSE and the Nasdaq only served to underline this inferiority complex.

Seen from a fresh vantage point, received wisdom can soon turn into a shibboleth. Following a crash in highly rated US equities, the UK reforms already look dated.

Take Hill’s most eye-catching proposal, to make London the next big home for special purpose acquisition companies. At the time these blank cheque vehicles, more commonly known as SPACs, were exploding in popularity in the US. From 2019 to 2021, US Spac listing proceeds ballooned tenfold to $163bn (£132bn) in the Americas, as they became the preferred means for raising equity.

By August, the Financial Conduct Authority had rushed through a series of listing rules to entice more shell companies to the Square Mile. Since then, just four Spacs have chosen London for their home, compared to seven in Amsterdam and dozens in the US.

This isn’t necessarily a bad thing: one of the chief attractions of Spacs in the US is the ability for early-stage merger companies to make bold income projections in their prospectuses. On recent evidence, this meant a lot of froth was admitted. Last week, analyst Horace Dediu noted that just five US Spacs out of 229 had seen an increase in their share price over the past 180 days.

Another Hill recommendation was to reduce the minimum requirement for publicly traded shares from 25 to 10 per cent.

The record for London-listed companies below this threshold is pretty ugly. In the FTSE All-Share, the three longstanding companies with a free float below 25 per cent have an average share price return of 68 per cent over the past five years. The one low-float stock that has listed in the past year, WAG Payment Solutions (WPS), is down 31 per cent since its debut. Within this coterie only 2019 debutant Airtel Africa (AAF), with its 18 per cent free float, has been a success.

Although neither Nasdaq nor NYSE mandates a minimum free float, it’s not clear this is a reason why companies choose to list in the US. Unrivalled liquidity and profile outstrip such concerns. Market data backs this up. According to FactSet, no stock in the S&P 500 has a free float below 25 per cent.

Of course, the predominance of dual-share classes in the US shows founder control can be preserved by other means. Such structures are another Hill Review favourite. But the experience of beauty e-tailer THG (THG), whose founder was forced to relinquish his special share, suggests UK investors are nervous about signs of governance dilution. Feting a business maverick like Elon Musk is easy from a safe distance, but it’s much harder to imagine London markets tolerating a FTSE 100 chief executive who pledged his shares in an erratic solo effort to buy out another listed firm.

Balancing the stewardship of large public companies with an open approach to market access is never going to be easy. But seen from the other side of a US equity rout, the Hill Review looks like answers to the wrong set of questions.

After all, all the rule-bending and political lobbying Whitehall can muster doesn’t look likely to land London the IPO of homegrown tech gem Arm Holdings. Sometimes, the market is elsewhere.