A company’s choice to go public will be one of the biggest milestones in its growth story. During the pandemic, we saw how effective the public markets could be in supporting companies in a time of uncertainty and change.
London continues to be one of the top cities when it comes to fintech innovation. With 18 fintech unicorns in the capital and 72 unicorns in the country as a whole, innovative ideas are born in the UK and as a company continues to scale, going public becomes one of the many questions for a founder to consider, but then a new question will pose itself: where do you go public?
The Fintech Times sat down with Charlie Walker, head of equity and fixed income primary markets, and Neil Shah, director and tech sector specialist, from the London Stock Exchange to explore why a public listing is a good idea, and how the landscape has changed in London.
What differentiates the London Stock Exchange from other exchanges around the world?
Walker: There are a few characteristics which make the London Stock Exchange quite unique. Firstly, it is the world’s most international market by almost any measure. Just under 40 per cent of all the companies listed on the exchange are not UK companies: they’re either not headquartered here, incorporated here, or have their primary operations here. Almost 73 per cent of the combined revenues of the FTSE 100 constituents are generated outside of the UK. That international diversity is then mirrored on the investor side. Approximately 60 per cent of the market value on the London Stock Exchange is held by international funds. This means that when international companies are seeking to raise capital from investors that understand the geographies in which they operate or wish to grow, they can find that supportive shareholder base in London.
Another differentiator is that we operate several markets, understanding that a one size fits all model is not in the best interest of companies or investors. Our markets are designed to offer companies choice and a market that’s relevant to their stage of growth and needs.
We are then relentlessly focused on ensuring our markets adapt to serve the needs of the companies and investors who use them. This is something the UK has become increasingly focused on recently, with a wide regulatory reform agenda to evolve the UK capital markets.
What have been some regulatory changes that have impacted ESG (environmental, social, governance) prioritisation?
Walker: Steady and gradual progress has been made to increase disclosure around ESG – all components of it, and I think it’s fair to say that the UK is a leader in how forward-looking it is being around this topic. In 2012, the London Stock Exchange became the first exchange in the world to launch a green bond market That has developed into the sustainable bond market, which has more than 379 bonds listed, raising over £100billion of capital.
We also announced at COP26 that we’re launching the Voluntary Carbon Market, which will facilitate the listing of funds that invest in projects that generate voluntary carbon credits. These funds will issue carbon credits as opposed to cash as dividends and enable the purchasers of those credits (which is likely to include corporates) to offset part of their emissions to help attain their net-zero targets.
In addition, we are part of the UN Sustainable Stock Exchanges initiative and ESG is increasingly being embedded in everything we are doing at the London Stock Exchange as a listed company ourselves.
What have been some other regulatory changes that have taken place following the Lord Hill listing review and the Kalifa review of UK fintech?
Walker: Fundamentally, the reviews, in different ways, asked the question, ‘how do we ensure that the UK is creating exciting high-growth companies and then ensure that the UK capital markets are one of the best places in the world to support them?’ The Hill review had 14 recommendations, which then led to multiple ongoing consultations.
The changes that took place last year include a reduction in the free float requirement from 25 per cent down to 10 per cent on the Main Market of the London Stock Exchange, changing the rules around allowing dual-class share structures for founders on the Premium Segment for the first time, and rule changes regarding SPACs (special purpose acquisition companies).
There are then multiple ongoing consultations which will determine what the next stages of reform are. For example, there’s the Primary Markets Effectiveness Review – a discussion paper released by the Financial Conduct Authority (FCA); and there is the UK Secondary Capital Raising Review, which is being conducted by Mark Austin, a partner at law firm Freshfields, looking at how companies already listed on the exchange raise further capital.
What would you like to see change to help more fintech entrepreneurs list their businesses in London?
Walker: I think the UK is an incredible place to start a business. The government deserves a lot of credit for this as, over a long period of time, it has ensured that the UK is a vibrant place to start companies through several different policies. However, there are things that could still be improved upon and we are encouraged to see these areas being investigated.
We are also very conscious that while it is encouraging that so many companies are starting in the UK, we now need to ensure they want to stay here. Unless we provide companies with the access to finance that they need – from being a startup all the way to a trillion-pound company, without the right support, we may never see a UK company become or create the next Apple or Alphabet. We need to make sure that the UK is one of the world’s leading places for companies to be founded, for companies to grow and for companies to scale and stay in the UK.
So, what more do we need to do? The answer is that we need to keep going. We need to see what parts of our system are not functioning as intended and are not meeting that objective of ensuring companies can access the funding they need. Are there elements that are acting as barriers for UK companies to grow? Then we need to address them systematically. And that is the process that has been ongoing. We have seen an enormous amount of change already happening in that regard. So yes, the short answer is the work’s not done; we need to keep going.
If you think about unicorn creation in the UK, we are in third place globally: only behind the US and China. Considering the population differences, that is incredible and something to be proud of. It’s also worth noting that last year, London was the largest centre of initial public offerings (IPOs) in the world, outside of the US and China. It’s important to celebrate the successes. We’re doing an incredible job of having these companies founded in the UK. It’s very much a case of how do you improve on a very strong base, rather than how do you correct a problem.
How many fintechs do you currently have listed on the London Stock Exchange?
Shah: You get a different answer, depending on who you ask, and I guess the reason why is that the lines between software and fintech are quite blurred.
We had seven fintech listings last year. Wise was our largest direct listing to date, coming to market with a market cap of about £8billion. LendInvest, a tech-enabled asset manager for property finance, and PensionBee, which allows you to consolidate all your pension plans into one place, also joined our markets in 2021. The year before we had Kaspi, a Kazakhstan-based superapp, that raised $100million locally and came to London to raise a further $900million.
The financial profile of some of these businesses is interesting. Compare Wise to PensionBee for example. When Wise came to market it had about £420million in revenue, growing 39 per cent, profitable and generating free cash flow, so it didn’t need to raise capital, so chose a direct listing. PensionBee had £6million in revenue, wasn’t profitable but was growing at almost 80 per cent. It had a successful IPO in 2021, raising £59.6million, and just moved up to the Premium Segment of the Main Market. These examples truly demonstrate that a variety of different businesses can have a successful listing experience.
To learn more about the fintech sector at the London Stock Exchange visit londonstockexchange.com/fintech
How big does your company need to be to list in London?
Shah: There is no ‘perfect size’ for our markets. If you look at our growth market AIM, for example, there are companies at the £30-50million market cap level going all the way up to billions like Jet2 and Fever-Tree.
There were 126 IPOs on the London Stock Exchange in 2021. If you look at how they have performed, London has done relatively better, whichever way you analyse it, be it a simple average or the weighted average, compared to the US stock exchanges.
In London, you tend to find patient investors and that’s exactly what we saw during the pandemic. About £100billion was raised in the UK to support companies, not just the exciting tech ones, but also companies like easyJet, Rolls-Royce and Marks & Spencer.
Why would a company want to go public and list on the London Stock Exchange, leaving the private market?
Shah: We’re really fortunate to have AIM, which is 27 years old and the biggest growth market in Europe, as we’re able to give entrepreneurs a choice. First and foremost, a listing gets you profile. Every company we speak to talks about the enhanced profile they’ve received from being a public company. We hear this from well-known private brands such as Trustpilot, which was backed by well-known venture capital firms and, upon going public, has become even more well known. That’s helpful for not only keeping and hiring talent but also winning business.
The second is independence. When a private business gets to a certain size, it may run out of venture capital or private equity funds that can invest in it. You have a choice whether to sell the business or, for those founders who want more, the opportunity to go public which enables them to remain independent.
Thirdly, it’s about raising capital. Public markets are typically less dilutive than private markets where investors often want board seats and preferential rights such as preference shares. In public markets, everyone’s typically playing in ordinary shares.
Fourthly, it’s currency. Having a list of shares means that your employees know what their share options are worth, and when you’re trying to hire employees or make acquisitions around the world, this can make things easier.
And finally, it’s the ability to come back and easily raise capital again. On our growth market AIM, you can do that in about three weeks, from start to finish, because there’s no need to issue a prospectus when you’re raising capital of let’s say 10-20 per cent. We see so many companies that do this. ASOS raised capital nine times during its time on AIM before moving to the Main Market.
Walker: People often focus on the IPO as the big event, but on average in a given year, about 75 per cent of capital raised by companies on the London Stock Exchange is by companies that are already on the market. We’re always focusing on the 25 per cent because of the attention an IPO generates, but that is just day one. Most of the companies that are listing are not doing it primarily because of the capital they raise at that point of the IPO. They are doing it because they want continued access to one of the deepest pools of capital in the world, the public markets, and once they are listed, their ability to access that pool of capital quickly is a huge advantage.
Should a company always aim to go public at some point or is it situational?
Shah: It comes back to a founder’s and management’s objectives. I think the public market really works when you can reap the benefits of being public. If you’re ambitious and you want to grow your market share – having a better profile and access to long-term capital is going to be helpful.
However, there is a cost attached to being public, and you need to make sure you’re getting more out of it than what it’s costing you. It doesn’t need to be a high cost. For some, it’s the cost of customer acquisition – that profile pays off in higher revenues and ease to retain and hire staff, and the ability to do M&A can be quite attractive. There’s an excellent podcast by US entrepreneur, Reid Hoffman – IPO or Sale – and Reid says that it can’t hurt for a company to prepare to go public, because at least they have the option. I tend to agree with him.
What should fintechs be wary of when going public?
Shah: They need to have a win-win mentality. If you’re negotiating a deal, or trying to do something, always strive to create a win-win situation. What’s in it for the other person? That may mean giving away a bit of value to incoming investors. We always recommend founders take their time to ensure things are done correctly from the start. Engage us early and we can connect you to our ecosystem of advisors and analysts to help you plan your IPO and not rush.