Governance concerns: UK ECM fortunes bleak even if EMEA market re-opens

Data InsightECM Pulse 27 September

Governance concerns: UK ECM fortunes bleak even if EMEA market re-opens

  • UK’s idiosyncratic issues highlighted by pound crash
  • Country acting like an ‘emerging market’, investor says

The UK is standing out from the rest of the world’s developed economies in the worst of ways, sources say, suggesting markets will remain shut for London IPOs even if they reopen in the continent.

London’s IPO market has been silent for most of 2022, alongside the rest of Europe’s major exchanges, due to the geopolitical and economic volatility that has caused huge swings in global equity indices.

But the country is also suffering from an investor perception of economic mismanagement by the country’s Conservative government, ranging from a Brexit process that has all but severed four decades of economic harmonisation with the European single market, to the new economic polices proposed by Liz Truss’ government.

Last Friday, new UK chancellor, Kwasi Kwarteng, unveiled a raft of debt-funded, and likely inflationary, tax cuts with a particular focus on relief for the wealthiest percentage of the population, cutting the highest tax rate in the country for those earning over GBP 150,000.

In reaction to the plans, sterling fell to GBP 1.038 against USD on Monday (26 September), its lowest ever recorded level and well below its 52-week high of GBP 1.38 to the dollar.

The fall in sterling was so severe the Bank of England was reportedly considering an emergency meeting to raise rates to offset the damage of government policy; the bank chose not to meet and instead issued a statement to calm markets. An equity capital markets investor at a large global institution said any conflict between the BofE and government would be an anathema to international equity investors and more akin to emerging markets countries like Turkey where government policy runs up against central bank orthodoxy.

“International investors are not even looking at the UK as a G10 economy; they are looking at it like an emerging market. If you have capital that is mobile, you want to steer clear of the UK,” said the investor, adding “any UK IPO is closed, there isn’t even a debate around that.”

Two London-based ECM bankers said that the crash in sterling, to its lowest ever levels against the US dollar, did not have an immediate effect on the pipeline, as it was effectively minute anyway, but one added he foresaw “meaty conversations” with potential issuers on 2023 deals over the feasibility of UK listings.

The UK’s IPO pipe has shrunk throughout the year. Burger King UK postponed IPO plans in February and Singapore’s Olam Group [SGX: VC2] announced in 2Q22 that the IPO of its food ingredients business was no longer expected to take place that quarter, with no clarity yet on when that process might re-start, this news service previously reported.

CVC Capital Partners has done little to move forward on its much-anticipated IPO, with this news service reporting a 2023 listing is more likely, although the London Stock Exchange had already lost the listing to Euronext Amsterdam, reportedly.

Companies that had been aiming for an Autumn listing included Allied Gold, WeSoda, Yo Sushi, which could command hefty valuations, are now examining other plans, including, in the case of Yo Sushi, a sale rather than an IPO, this news service reported.

In fact, one consequence of the collapse in sterling might be the opportunity for companies to pick up UK businesses for cheaper valuations, further depleting the listed Plc scene.

The country is in “a sad state of affairs”, noted the investor, especially given the huge amount of work that many have undertaken to make the London Stock Exchange a more attractive listing destination for international issuers.

There has also been a public courting of Japanese conglomerate Softbank [TSE:9984] to list UK-based company ARM Ltd in London, despite the issuer’s public preference for New York.

“All this makes that [effort] look a farce, why would any international issuer choose to list anything in the UK, it makes sense just to go to the US,” the investor said.

London has fallen to fifth in EMEA’s exchange IPO league table, according to Dealogic, and will soon be leap-frogged by Germany with the mega-listing of Porsche which closes this week.

Several sources speaking to this news service compared the UK to Italy, which is higher in this year’s IPO rankings. Italy has a spate of candidates preparing to list and its own potential political volatility to deal with given the success of a new right-wing government in a general election on September 25. A third ECM banker said that while the government is controversial, it won’t stop Italian deals.

“There is still no unique Italian ECM problem,” he said. “The only country where we have such a firm economic differentiation is the UK, which is now on a very different path from the rest of Europe.”

HM Treasury declined to comment beyond previously released statements.

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