Join our community of smart investors

Over the Hill: can a listings shake-up boost London’s prospects?

The UK Listings Review is proposing an overhaul of the current rules to attract more IPOs and Spac listings
Over the Hill: can a listings shake-up boost London’s prospects?
  • Lord Hill’s recommendations would see London embrace the current craze for Spacs
  • Not everyone is convinced that these changes would be for the better

UK equity markets have been shrinking in recent years as more companies choose to remain private or be taken private by buyout firms. The number of UK-listed companies has fallen by around two-fifths since 2008.

According to a report from broker Peel Hunt and the Quoted Companies Alliance, only a fifth of fund managers believe that the number of companies listed in the UK will rise in the future, with cheap capital from private equity and “burdensome listing requirements” being cited as some of the main barriers.  

We have seen various new listings in London this year. Data compiled by FactSet indicates that 11 companies have IPO’d in the UK so far in 2021, raising £4.1bn, and this includes the likes of bootmaker Dr Martens (DOCS) and greetings card retailer Moonpig (MOON).

But the City has only accounted for 5 per cent of global IPOs over the past five years. London is facing increasing competition from other financial hubs – particularly post-Brexit – with start-ups gravitating towards deeper pools of capital and more flexible listing regimes overseas.

“Our current IPO system is inefficient and inflexible and is driving these businesses into the hands of international competitors to the City,” says Daniel Pinto, chief executive of Stanhope Capital. “London has watched some of the UK’s best and brightest growing companies walk out of the door, as New York provides a more hospitable environment for their development.”

Looking to reinvigorate London’s allure, Chancellor Rishi Sunak launched the UK Listings Review in November, commissioning Lord Hill of Oareford to examine how to make the City more attractive for equity listings. Publishing his findings earlier this month, Lord Hill has proposed a swathe of measures to liberalise the current rules. His key recommendations include:

  • Allow dual class share structures in the premium listing segment of the London Stock Exchange (LSE).
  • Reduce the free float requirement – the proportion of a company’s shares that are publicly traded – from 25 per cent to 15 per cent.
  • Relax rules around ‘special purpose acquisition companies’ (Spacs).


Levelling up

The suggested reforms are “not about opening up a gap between us and other global centres,” says Lord Hill. “It is about closing a gap which has opened up.”

The US and Hong Kong are much more lenient when it comes to multiple share classes, and founders of start-ups prefer dual class arrangements as additional voting rights enable them to retain greater control. At present, companies with dual share classes are only permitted a standard listing on the LSE and are excluded from the FTSE 100 and 250 indices.

For example, because The Hut Group’s (THG) founder Matthew Moulding has a ‘golden share’ that allows him to block any shareholder resolution, the company had to opt for a standard listing when it floated last year.

In order to encourage more high-growth businesses to IPO in London – particularly from the tech and life sciences sectors – Lord Hill is proposing that companies listing on the LSE’s premium segment be permitted to have Class B shares with up to 20 times the voting power of ordinary shares, for a maximum of five years. By cutting the free float, founders aren’t forced to sell their shares earlier and cheaper than they would have liked.

Perhaps demonstrating the appetite for such reforms, food delivery app Deliveroo announced that it had chosen London for its hotly anticipated IPO just a day after the Hill review was published. While any new rules would come into force after Deliveroo goes public, the company is still using “a time-limited dual-class share structure closely aligned” with Lord Hill’s recommendations.

If the review’s proposals do become a reality, in the long-term, it could lead to a rebalancing of the FTSE from ‘old economy’ stocks, such as banks, to the companies of the future. But not everyone is convinced. There are concerns over liquidity, minority shareholder protections and the potential loosening of corporate governance standards. The ‘if you can’t beat them, join them’ attitude when it comes to the infatuation with Spacs has also been met with scepticism.


Should London join the Spac bandwagon?

Concerns that other businesses won’t follow Deliveroo’s decision to IPO in London may have forced Lord Hill’s UK Listings Review to include controversial Spacs. 

This month the Financial Times reported that New York-listed Spac, Tailwind International, is searching for European tech targets and that UK companies such as used car site Cazoo and health app Babylon have held talks with US Spacs.

Spacs are listed shell companies that exist to raise money for acquisition targets. The process (explained by Paul Jackson in Investors’ Chronicle) of buying a real economy business is effectively a reverse takeover which results in a listed entity that can raise more money but without submitting to the standard IPO disclosures and due diligence.

While the UK Listings Review suggests further safeguards, including suspending trading of Spac shares on announcement of potential acquisitions, there is a sense that this part of the report has come about reactively due to competition for tech start-ups from across the Atlantic.  

“[listing via a Spac] gives a company ability to become public very quickly with low cost but sometimes the journey is important as well”, says Mike Coombes, head of external affairs at, the platform that connects investors with companies raising capital. He emphasises the importance of the preparatory process with advisers ahead of traditional IPOs, something that doesn’t happen with Spacs.

Professor John Kay, who conducted a review of his own into the efficacy of capital markets after the global financial crisis, is also sceptical: “We have requirements around IPOs for a reason. Spacs are a way of getting around that.”

For Kay, there is a wider point to be made about the Hill review: “[The] fundamental issue is whether the reason we have listing rules is to attract business to London or discipline companies. This seems to be about attracting business to London.”

Some aspects of the report do meet with the professor’s approval, such as the proposal to allow dual class share listings. He says, “It’s worth experimenting with. [It] may improve rather than worsen governance”. Expanding on that hypothesis Kay asks: “Is very dispersed shareholding good for governance as opposed to founders or institutions deeply engaged with a company? Maybe a dual share class helps with that.”

Another recommendation that raised eyebrows was to potentially change IPO liquidity requirements from 25 per cent of shares issued. The London Stock Exchange makes the supporting case, emphasising that on other exchanges free float requirements are a mixture of percentage, nominal cash amount and the number of investors on a register.

Charlie Walker, Head of London primary equity markets, explains: “Free float is designed to ensure sufficient liquidity exists in the aftermarket and the latter two points [cash and number of investors] are important alongside a percentage requirement.”

In the long-term, the most radical changes could be around prospectus rules. In the view of and Coombes, changing this aspect of the regime – which will require primary legislation in Parliament – is a huge potential benefit that’s now in the government’s gift post-Brexit.

Specifically, reducing the arbitrary €8m limit on raising follow-on capital from retail investors and the six-day delay period (to allow reading of the prospectus) that holds up IPOs involving retail investors could improve public participation in public markets.

Some of the review’s goals are laudable. Still, in Kay’s opinion, it would have been preferable had the UK government’s focus been to commission a review that prioritised enhancing finance’s contribution to non-financial business. At the very least there should be a focus on businesses and not financial engineering that could lead to wider detriment.

Despite the good aspects of the review, the courting of Spac business is worrying for markets and the wider economy. As Kay puts it: “We want a finance sector that’s about improving beta, rather than chasing alpha.”


See also this week' No Free Lunch column: 'Hill Review: Public markets could still be led a private dance'