Experts set out their views to Insurance Insider on the potential impact of reforms announced by the Financial Conduct Authority last week to make the listing regime easier to understand, less onerous and more competitive.
In one key change to the listing rule book, the existing "standard" and "premium" listing segments will be replaced with a single category for equity shares in commercial companies.
A single category, the FCA said, would remove eligibility requirements that can deter early-stage companies, be more permissive on dual-class share structures and remove mandatory shareholder votes on transactions such as acquisitions to reduce friction for companies pursuing an IPO.
The reforms were proposed in light of a 15-year decline in London IPO activity. UK listings have fallen by 40% since 2008, according to a review undertaken by Lord Hill, whose recommendations triggered the reforms.
Insurance Insider’s own research shows that London has struggled to attract major listing, by value, in the financial services sector for the best part of a decade.
A recent sign of London’s waning attraction was in Fidelis’s decision to list the balance sheet business within its new bifurcated structure in New York, though as the company is in the midst of that process, it declined to comment on the rationale for its chosen location.
One source said the investment community will likely be tracking developments at Ascot, Canopius, Aspen and Inigo, which were described as “in scope” for a potential IPO in the near to mid-term future, to decipher their preferred destinations.
It was also noted, however, that there are multiple factors considered in assessing listing locations.
London has developed a certain level of notoriety for the documentation and expense involved for a “premium” listing, which imposes intensive compliance and disclosure requirements, though unlike a standard listing, it enables a firm’s inclusion on the FTSE indices.
One source said: “It’s an expensive, time-consuming, resource-intensive business and premium listings come with even more requirements than a standard process. There are the requirements for working capital statements, sponsors, investment banks, lawyers and advisers. A prospectus can often end up at around 1,000 pages.
“At an absolute minimum, you’re going to embark on the work towards a prospectus six months at least before you want to IPO, so timing is a key issue. You’re spending an awful lot of money from day one – and it could be wasted if it never actually materialises.”
The FCA’s change from premium and standard to a single category might remove unnecessary burdens for firms and some of the expense, but a “missing piece of the puzzle”, one source said, is whether a single category gains a place for all firms on the FTSE indices. The FCA said it didn’t know how index providers will react to the reforms, but invited comments on the impact of the changes to its consultation, which closes on 28 June.
Because of the way fund managers operate, the source added, not having a place on the indices effectively could “put a barrier between a company and investors”.
The new proposals could also mean existing disclosures are relied upon to highlight cash demands on the business and its near-term capital raising plans beyond the IPO, rather than having to specify this information in working capital statements for the prospectus. This change may remove some impediments for early-stage insurers.
Lack of liquidity
While these reforms may help, there are other macro factors that have eroded the UK’s attraction for new IPOs, including a liquidity issue that has plagued the equities market for several years.
A source explained that local defined benefit pension schemes have moved during the past 20 years from investing substantially in equities to “virtually none”, as they pursued a path of asset-liability matching to their older beneficiaries.
Defined contribution schemes remain significant equity investors, but they have also moved to funds that invest more heavily in bonds, for example, leaving less sums invested in UK equities. This problem has been exacerbated, the source explained, by MiFID rules that have affected liquidity for small and mid-cap equities.
Another factor overshadowing all this is the lasting effects of Brexit.
As one source said: “Post Brexit, a lot of the European fund management community (though not all of them) basically said ‘we’re not investing in the UK anymore, it’s a basket case,’ while the US put decisions on hold before they started to come back.”
Another added: “There needs to be correction of the perception that the UK framework and trends are effectively hostile to investment in equities.”
All of this might suggest a low likelihood of a major insurer opting for London over the US to list, but such decisions will be led more broadly by corporate strategy, maturity of the business and timing.
One source suggested another one or two London market IPOs in future may help Beazley, Conduit, Lancashire and Hiscox, as newly listed London carriers inform the investor community about the complexity and idiosyncrasies of the Lloyd’s specialty market and hard market cycles.
The regulatory angle
A final relevant aspect of London’s attraction is the competitiveness objective for regulators that will be enacted imminently, via the Financial Services and Markets Bill, with the Treasury seeking views on metrics to hold the regulators accountable on this new duty.
The FCA sought to position the listings reforms as a means to “boost growth and competitiveness”, but as Sean McGovern highlighted last week, in his role as chair of the London Market Group, the industry would benefit more from a wider framework to drive these sorts of reforms rather than isolated “knee-jerk reactions.”
Crucially, the FCA said it wants an open discussion about the changes needed to support a listing regime based on disclosure and engagement, rather than regulations. Announcing the reforms, FCA CEO Nikhil Rathi emphasised a move to rebalance the burden of regulation and enable investors to participate in London IPOs on their own terms and risk appetites, rather than those set by the regulator.
This speaks to a change in general regulatory behaviour the London market has lobbied for, in that firms hope for a switch in focus to flexibility and an exercise of judgement by the watchdogs, instead of a preoccupation with process.
The FCA’s reforms may not be a panacea to bolster IPOs, though they represent more than just tinkering. They certainly signal a more proportionate approach to the paperwork, but this is just a start.
For a competitiveness objective to become meaningful, the London market and wider financial sector will need to see the results of this newfound flexibility materialise in policy and visible results.
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