Don’t lock the world out of London: New rules send the City back to the dark ages
THERE is a well-used phrase in management, that it is better to make a wrong decision than none at all. The exception must be Mark Makepeace, chief executive of the FTSE Group, who this week ruled all listings in London from next month must have a 25 per cent free float
In enforcing this, he is potentially sending the City back into the dark ages. Makepeace was reacting to concerns that the FTSE 100 index has been hijacked by overseas commodity and energy groups like ENRC, Ferrexpo and Fresnillo, who have listed in London but with a free float under 25 per cent.
Some pension fund managers, particularly those that run index funds, have said this scarcity of stock made available to them serves to inflate the value of the company and give a free ride to those who refused to dilute their holding beyond the bare minimum.
Ian Hannam at JP Morgan Cazenove, who has done more than any other banker to bring emerging market companies into the FTSE 100, slammed it as a “Little Britain attitude”. He is right to do so, the decision could end up making us a lost Britain as well.
That is what will happen if the National Association of Pension Funds gets its way. It believes the free float should ultimately be lifted to 50 per cent. Bankers, lawyers and accountants in Hong Kong, New York, Singapore and Shanghai must be rubbing their hands in glee at the business that will be heading their way.
Remember America’s Sarbanes Oxley Act in 2002, which was introduced after the dotcom boom? As well intentioned as it was, the overload of regulation to tighten up boardroom behaviour sent the Big Apple into reverse.
This time round it is the City, the UK’s most prized asset, that could be sent into a tailspin. It appears we have been denied a proper debate, not even one that discussed whether index funds should have an A or a B category, the latter category being for free floats below 25 per cent which they can’t invest in. Such a scheme would be simple, easy to implement and send out a message that we are still open for business.
The UK has enough problems on its plate without being sidelined as a financial capital as well. Until this point the City’s willingness to act as a global stock exchange for emerging market commodity stocks has directly plugged us into the main arteries of the world economy. Commodities fed the last boom and if we are to feed the army of advisers in London we want them on our doorstep for the next boom.
We are never going to find gold, aluminium or other minerals in the UK – certainly in the quantities that are required – but we can provide the finance, as well as the intellectual capital in legal, accountancy and other areas.
Ever since the South African beer group SAB (now SABMiller) moved its primary listing to London in 1999, it has been followed by a steady trickle of other overseas groups wanting to use the London market to finance global ambitions. But it wasn’t until six years ago that the trend accelerated on the back of the booming emerging markets and the demand for commodities led by China. The City was one of the first financial centres to spot the opportunity, and as a result companies from India and Mexico to Russia and Kazakhstan were lined up to list in London and enjoy a Western valuation.
However, it is the latest wave of Russian companies – and the knowledge there are many more to come – that has brought the tensions to the surface. When overseas groups listed here before there was a view that they were raising money to help finance international ambitions. Some fund managers believe that is not the case here, that fundraisings are this time more about lining the pockets of oligarchs.
It’s a short-sighted view. We shouldn’t be worried about ownership, we should be concentrating on the quality of the assets and the ability to invest in them. That is what matters, not that some oligarch will have another few billion added to his wealth.
In time and through more corporate activity, oligarchs will dilute their holdings to increase the free float above 25 per cent. In the meantime, so long as fund managers are confident in the independent boards appointed to police these companies and have assurances from the owners that they will not abuse their majority shareholding, then the City must ensure the door is kept open, not closed.
Most of us can still recall the dotcom boom when index funds piled into multibillion technology flotations and went on to lose it all. We have since learned that the valuations attributed to those listings did come from outer space, which cannot be said about the emerging market companies. A phalanx of advisers and experts spend many months holed up in various outposts of the world to ensure that reserves are proven and the assets are genuine.
If only that same level of diligence had been done back in the dotcom days.
John Waples is UK head of strategic communications for FTI Consulting and has advised Polyus Gold on a possible London float.
The UK has enough on its plate without being sidelined as a financial capital as well