The UK remains a highly attractive proposition for companies looking to enter the public markets, or raise equity capital, according to FTSE leaders at UK-listed companies in a new report from Numis, a leading UK focused investment bank.
The report provides a counterbalance to the prevailing narrative that London is at risk of losing its position as one of the world’s pre-eminent capital markets destinations.
The report, which includes the views of 150 FTSE leaders within UK-listed companies, conducted in May 2023, reveals an overarching view held by UK PLC that the London Stock Exchange’s competitiveness as a capital markets hub versus rival exchanges is improving, with 90% of FTSE leaders expecting either a dramatic (41%) or slight (49%) uptick in market competitiveness in the next three years.
The report comes at a time when policymakers are taking bold steps to improve the long-term competitiveness of UK markets, with the Mansion House Reforms the latest such development. Whilst sentiment amongst FTSE leaders is widely positive, they have collectively highlighted several areas where more work needs to be done.
An improving listings outlook
Against a challenging global macroeconomic context, the lack of IPOs over the past 18 months has been an acute headwind facing global exchanges. Despite ongoing volatility, the vast majority (93%) of FTSE leaders of UK-listed companies are looking ahead with renewed optimism, believing the number of IPOs will ramp up over the next two years.
Despite the challenging environment for capital markets, respondents were almost unanimous that more companies would choose the UK as their listing destination in the coming years. There was also wide consensus (94%) that UK and European private companies would choose London or European markets as opposed to the US when it comes to listing, due to various factors, including the mixed performance of UK and European companies which have listed in the US market.
Locking in London’s future as a financial centre
However, more needs to be done to future-proof London’s position as a leading financial centre. Despite broad consensus on the overall market appeal of the UK, FTSE leaders were split on the point of critical importance to improving its attractiveness as a listing venue; 38% highlighted the need for a more competitive executive remuneration environment, and 32% a less rigid corporate governance regime.
The FCA’s ongoing efforts to reform the listings regime have been warmly received by FTSE leaders, with 92% signifying that the latest set of proposals would be helpful for the market. FTSE leaders were almost unanimously supportive (99%) of scrapping the two tier-listings framework, though 42% of AIM market respondents felt the proposals do not go far enough.
The perception of high-quality regulatory frameworks, paired with a strong financial ecosystem and a robust corporate governance code, continue to act as the primary points of attraction to international investors. Hence, the UK has a fine balance to strike in preserving investor protections whilst recognising the need for evolution in the listing regime.
Ross Mitchinson, Co-CEO of Numis said: “We have been encouraged by the efforts of the regulator to address some of the concerns around UK market competitiveness, and our survey data tells us that FTSE leaders of UK-listed companies share this view. The Chancellor spoke of evolution not revolution with regards to pensions policy at the Mansion House dinner – and that sentiment carries through to our survey data.
There is room for additional bold steps to enhance London’s attractiveness – whether that be for homegrown UK businesses or as an international financial centre – though the UK needs to balance that with maintaining the high standards of regulation and governance it has come to be known for.”
Deploying pension capital
The narrative around pension fund investment in UK companies has been one of particular salience, with Jeremy Hunt’s Mansion House Reforms addressing some of the concerns that have been raised. FTSE leaders were clear on the outlook, with 75% expecting pension funds to increase their allocation to UK equities in the next two years.
Unlocking pension capital for investment in UK equities provides an important lever through which policymakers can improve the prospects of the London market. A very significant majority of FTSE leaders were in agreement (91%) that channelling pension capital into the UK market would meaningfully improve valuations, thereby encouraging IPO activity.
From a regulatory standpoint, 84% of FTSE leaders pinpointed reform to pension fund accounting rules, omitted from Hunt’s Mansion House Reforms, as critical to unlocking pension capital for UK equities. Additionally, 91% were supportive of recent calls to mandate pension funds to allocate a fixed portion of their portfolio to UK equities, rather than the voluntary DC compact that was announced. Another 63% felt that amending the rules that require life insurers to assign higher risk weightings to equities would facilitate greater investment in the UK market.
International institutional investors have been increasing their allocations to UK equities for several years. The internationalisation of the investor base in UK PLC was seen as a clear advantage by 84% of FTSE leaders, who pointed to improving share liquidity as the principal reason.
Alex Ham, Co-CEO of Numis added: “We have long been advocating for reform of the UK’s capital markets to reinforce London’s competitiveness on the international stage. While we welcome the Mansion House Reforms, with the DC Compact a positive step in fostering a healthy pipeline of private UK growth companies, there remains more to be done to ensure that those companies opt for a UK listing when the time comes.
Our recent survey of more than 200 executives at founder-led companies across Europe revealed that 88% had plans to list within the next three years, so there’s a real opportunity to attract successful homegrown UK startups and international issuers to London. The introduction of the ‘intermittent trading venue’ for private companies looking for access to the capital markets is a step in the right direction. With the right support from the government, the UK can certainly become the go-to destination for high growth private companies looking to take the leap into public markets.”.
A super-sector approach
Jeremy Hunt’s Mansion House reforms talk to the role of pension schemes in turbocharging the expansion of the UK’s fastest growing sectors. The UK has the potential to unlock one or more super-sectors, and both investors and policymakers have a role to play. Nearly six in ten (57%) FTSE leaders were of the view that financial services is that sector. Though to maximise the potential for innovation, fintech should be the focus – where the UK already has an edge. As the Chancellor mentioned, in the last decade the UK has become home to Europe’s largest life sciences sector, so further discussion is needed on how we can fortify our competitive advantages in the healthcare sector. The UK is also a leader in energy transition technologies as the global community strives to achieve net zero. London can play an important role in helping cleantech companies scale as the London ecosystem responds to the opportunities to build businesses that help to tackle climate change.