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Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.
How often do you reach for the snooze button when the alarm goes off? Once, maybe twice? Perhaps you just turn over and go back to sleep.
When it comes to economic alarm bells, the U.K. doesn’t have the same luxury. The most recent one rang last week, and centred on the City and, in particular, on the London Stock Exchange (LSE).
As has been widely reported, Arm Holdings, the Cambridge-based chip designer, has opted for a New York listing despite notable government lobbying. Coincidentally, Irish-based CRH, the world’s largest building materials group, has announced its intention to move its primary listing from the FTSE 100 to New York.
Specific factors influence each firm’s decision. For example, Arm cited London’s disclosure rules, while the US is CRH’s major market (tellingly in 2020, it began reporting earnings in US dollars). There are also unifying factors that explain why a company will choose New York. These include much larger valuations, more liquidity, better research analysts and less controversy around executive pay. When it comes to tech companies specifically, the nature of Deliveroo and DarkTrace’s IPOs – and some of their media coverage – has also impacted London’s attractiveness.
The combined effect is feeding concerns about the City’s competitiveness, and there are growing fears that promising growth companies won’t actively consider listing in London, and that the current drip-drip of companies moving to New York may become a flood. Arm’s decision has also raised wider issues about the UK’s strategy for semiconductors and other innovative high growth sectors.
There is perennial debate about whether the UK, or indeed Western Europe, could produce a global tech leader, in the way that the US has. If anything, Arm fits this mould. Yet it was sold to Japan’s Soft Bank in 2016. At the time, the sale was seen as reflecting a broader matter – namely, the tendency for fast-growing UK firms to be sold either too early or to overseas investors. Another example includes DeepMind’s sale to Google in 2014.
This pattern is partly a reflection of the UK’s funding gaps in providing finance for firms to scale-up. Ultimately, a country that does not address such gaps will always struggle to have a stock exchange that is full of its innovative companies.
Unless these issues are addressed, there is a danger of a self-fulfilling cycle – whereby, if UK funds do not invest in growth companies because they are not yet profitable, then they may not receive the investment needed to grow, or will look to overseas capital, which increases the likelihood of one day listing abroad.
It should be noted that Soft Bank’s Chairman and CEO, Masayoshi Son, has always indicated that he wanted to list Arm publicly in the US. And although the listing is not in London, it is interesting to note that Arm announced that it will open a new site in Bristol, keep its HQ and “material IP” in Cambridge, and possibly seek a secondary listing in the UK. So all is not lost.
The issues surrounding listings are not new. As I noted in 2018 in the Financial Times: “Keeping as many global players in the FTSE 100 index as possible is important for London and should be a priority. As more of global growth comes from outside Europe, competition between big equity indices will intensify.” At that time, the focus was on Unilever and its dual-listing, including unifying to enjoy the economies of scale from one listing.
Now, the debate has widened and has had a lot of policy focus in recent years, most notably with Lord Hill’s Listings Review in 2020, as well as the subsequent Austin Review in 2022 – albeit primarily from a retail investing perspective.
As Hill’s Review highlighted, it is significant not only that the number of Initial Public Offerings has fallen since 2008, but also that the composition of the London market resembles the “old economy” – namely, industrials, banks and consumer staples.
While investing in the former may be useful in an inflationary environment, and tech companies that aren’t yet profitable may suffer as the era of cheap money comes to an end, the LSE needs to be reflective of the economy of the future. More than this, Hill noted the wider economic benefits of strong public markets for the economy, risk and savings, with firms finding it easier to raise funds to grow and invest, plus providing greater opportunities for investors from the UK and overseas.
Separately, as I noted in my 2021 Policy Exchange strategy paper on the City, policy towards financial services should distinguish between changes that increase the City’s competitiveness and those that improve how it services the wider economy. Both are critical, and the latter helps to feed the former. The latter includes closing the patient capital and growth capital funding gaps, and liberating the UK’s deep pools of insurance and pension capital.
For the City, it is vital to ensure that the regulatory burden is appropriate. While no-one wants a bonfire, we must avoid using further regulations as the immediate policy lever, and challenge the mindset that any regulatory change increases untold risks.
While there is a renewed focus on the City, it is important that events of the last week do not divert attention from the great advances in the last two years, and how much regulatory change has either already occurred or is underway.
The Edinburgh Reforms, unveiled last December, covered a broad array of areas. Notable was a reiteration of the need for proportionate regulation and, in particular, for UK regulators to have clear, targeted recommendations on growth and international competitiveness. While welcome, we should be moving towards streamlining how much we give our regulators to focus on. Too many objectives effectively leads to none.
There was much else to welcome in these reforms, including the regulatory overhaul of prospectuses, creating a financial market infrastructure sandbox, updating the Green Finance Strategy this year, and the new consultation on innovation in digital. Technology and digitalisation will be key to boosting retail participation and could be the key to boosting liquidity.
There is a need for a sense of urgency, not just to catch up with the US, but others, even the EU, are moving speedily in financial deregulation.
Finally, with the Budget imminent, this news has focused attention on what policy levers might be pulled to grow and keep innovative companies in the UK – in the hope they’ll choose to list here. This is where encouraging business investment, increasing R&D and liberating the UK’s deep pools of capital comes into play. The listings saga is a reflection of the UK not making the most of its vibrant domestic economy and not allocating capital in the right places.
In 2007, the front cover of Goldman Sachs’ Global Annual Report was a bird’s eye view of St Paul’s Cathedral. Then, it seemed that London was the centre of everything. Much has changed since then. While the LSE is just one component of the City’s vast eco-system, and London remains one the of the world’s two largest financial centres, the issues linked to listings should focus attention on the City’s competitiveness and the role it plays in the domestic economy. There is a need to heed the alarms.