Can the London Stock Exchange survive another ‘relentless’ exodus in 2024?
The London Stock Exchange was bruised and battered by a string of take-privates last year. Analysts fear worse could be in store for the capital’s flagship bourse this year, from FTSE 100 giants to small-cap warriors
When foreign private buyers swooped in to pluck the likes of Ted Baker and Go Ahead from the London Stock Exchange in 2022, jitters and nervous whispers quickly took hold in the City.
For many bourse watchers, it seemed the first half of 2023 would be the period London’s discount finally came home to roost. Scores of firms were expected to be taken into private hands as the fabled pile of private equity ‘dry powder’ finally began pouring into the market.
What followed was something of a damp squib in the subdued opening months of the year. But after a buoyant second half and predictions of rate cuts on the horizon, private equity firms and corporate buyers are said to be limbering up for a deal offensive once again.
Analysts and lawyers at top City firms say they have been prepping for a wave of deals in London after bosses began prepping companies for sale in the final months of 2023.
Charles Hall, head of research at investment bank Peel Hunt, said today the “trends are clear” as private firms look to take advantage of lacklustre valuations and the flow of cash away from London’s public markets.
We have some tremendous UK listed companies which continue to look undervalued
John Farrugia, co-chief of investment bank and broker Cavendish
“The key takeaway is that the pace of de-equitisation is relentless and will likely continue unless action is taken and impacts quickly,” Hall wrote in a note to investors. “This is driven by the low UK valuations, which makes it an attractive hunting ground for acquirors and is a key factor behind the dearth of IPO activity.”
Listed companies have felt the pain of a rapid flow of money out of UK-focused equity funds in the past two years. In a torrid two and a half years in which the FTSE 100 has lagged behind its international peers, equity vehicles have been hit by 30 months of outflows as investors hunt for better returns in bonds and international markets, Hall says.
The result has been a “self-fuelling” negative trend, in which negative flows weigh on UK equities and make them appear a poor bet for fund managers and retail investors.
Valuations have therefore been in the doldrums and firms have been ripe for picking. A total of 40 firms were eventually taken private last year after a flurry of activity in the closing months of the year, with over half of the buyers coming from outside the UK.
London takeovers last year over £100m (£bn)
John Farrugia, co-chief of investment bank and broker Cavendish, tells City A.M. a lively flow of public-to-private (P2P) deals looks set to continue without a sharp rebound for the market’s fortunes.
“We have some tremendous UK listed companies which continue to look undervalued,” Farrugia says. “We expect further P2Ps unless the public markets begin to recover.”
James Parkes, a corporate partner with law firm CMS, adds that smaller firms on London’s junior AIM market look particularly susceptible to bids and the firm is expecting the wave of offers from private buyers to “continue into the new year”.
The cocktail of pressures are likely to culminate in a heavy new year headache for the London Stock Exchange’s top brass, who have been grappling with a drop-off in IPOs and questions over the City’s future for the past year.
Efforts to reform the market, boost the FTSE 100’s appeal and make it a more appealing place for companies have gathered steam. The FCA published its final proposals to reform the market just before Christmas, with headline tweaks including merging the standard and premium segments of the market and scrapping a requirement for firms to get shareholder approval for major deals.
The everyman is similarly being leant on as a potential solution, with the government and City reformers looking to unlock a pool of retail capital worth a potential £740bn.
Change can happen – and needs to happen quickly to prevent an exodus – Hall says. Tax tweaks to increase appetite from retail investors, including potential changes to capital gains tax and dividend tax on UK shares, should be on the table in his view, and a sudden increase in allocation by pension funds and insurance firms could also provide something like a remedy.
But without fast movement, many in the City are fearing that exodus could become the watchword in the Square Mile this year.