Boosting UK capital markets:why the City needs to modernise at lightning speed

The UK’s Initial Public Offering (IPO) market has been grabbing headlines across the globe. Recent developments, such as SoftBank’s decision to list chip maker Arm in the US, have caused real concern about London’s future as a tech hub.

Last year we saw a significant slowdown in global IPOs, but London outpaced declines in New York and Europe. As the UK capital struggles to attract new listings, the government is working with market participants to make London a more attractive location for IPOs.

Here at Chatsworth, we’ve been leading the call for UK capital markets to modernise and modernise fast. For too long now the City has been complacent. We need to look at the reasons why tech firms are leaving London and push the UK’s digitisation strategy to the forefront of the government’s agenda.

What caused the slowdown?

Technology companies have been a central component of London’s IPO activity in recent years. In 2021, Darktrace, Deliveroo, and Wise helped UK tech IPOs raise £6.6bn out of a total of £16.9bn.

However, London has seen a 40% decline in IPOs since 2008 and has struggled to match the growth of rival markets in Europe. For example, Amsterdam overtook London as a share trading venue soon after Brexit in 2021.

Funds raised by companies listing in London plunged by more than 90% in 2022, with the market cooling due to slowing economic growth, rising interest rates, and wariness around the performance of British firms. Fears over the economy and a drop in startup funding have also led to more companies choosing to list in New York instead of London.

British chip designer, Arm, was considered a jewel in the crown of UK tech and was lobbied by successive prime ministers to choose London for its IPO. Arm recently decided to list in New York, leading to worries that London will miss out on more blockbuster tech listings.

Arm chose to list in New York because of the greater scale and more robust liquidity of US capital markets, with Arm’s Chief Executive, Rene Haas, claiming that a US listing is the best path forward for the company and its stakeholders.

Yoko Spirig, CEO of Swiss fintech Ledgy, recently wrote a letter to the Financial Times [paywall] arguing that the UK can’t afford to rest on its laurels as other tech hubs like Berlin and Paris increase their talent pool and investment capacity.

Efforts to boost UK capital markets

As demonstrated in UK Finance and EY’s recent report on UK Capital Markets, the overall health and prosperity of the UK should not be underestimated, but UK capital markets are at an inflection point.

Both the government and the London Stock Exchange have made efforts to incentivise London IPOs in recent years.

Late last year, the government published its Edinburgh Reforms agenda comprising over 30 proposed changes to existing rules in a bid to enhance the competitiveness of UK capital markets.

Measures such as the Accelerated Settlement Taskforce form a key component of the Edinburgh reforms and are central to the UK government’s efforts to accelerate securities settlement cycles, with the settlement cycle for equities already poised to move to T+1 in the United States.

Accelerating securities settlement cycles and updating market architecture will contribute to the UK’s digital transformation, but all city stakeholders need to be aligned to secure the UK’s reputation as a financial innovator – as outlined by Michael Carty, CEO of Euroclear UK and International, in his article for the World Economic Forum.

Julia Hoggett, CEO of London Stock Exchange Plc, said there needs to be a “constructive discussion” [paywall] about executive pay in Britain as part of broader efforts to boost the attractiveness of UK capital markets.

More recently, the Capital Markets Industry Taskforce (CMIT) commissioned a report to lay out what needs to be done to keep London a globally competitive financial centre. The report will assess law and regulation, market practice and cultural change.

There is now an opportunity to deliver structural changes to enhance the competitiveness of UK capital markets, which will require all market participants to collaborate with the government and create the right conditions for economic growth.

The digitisation agenda

Digitisation is a key component of efforts to boost London’s position as a global financial centre. Efforts such as the 2021 UK Listings Review and the 2022 UK Secondary Capital Raising Review show that digitisation will be a driving force when it comes to attracting future IPOs.

The government created a Digitisation Taskforce to enhance shareholder democracy through the digitisation of share certificates, which will help boost London’s position as a global financial centre and empower individual investors to participate in secondary capital raisings.

Chatsworth welcomes the UK government’s efforts to harness new technologies to boost the competitiveness of UK capital markets. If the City wants to attract firms back to the London stock exchange, we must embrace digitisation whilst maintaining a steady and orderly market.

Boosting the competitiveness of UK capital markets 

There is still much data that suggests London is a relatively safe bet for IPOs. Companies that floated on the London Stock Exchange in 2022 declined on average by just 1.6% as of end-December, compared with a 23.5% average fall for newly-listed companies on the New York Stock Exchange and a 24.2% fall in Frankfurt.

However, recent events should not be dismissed as a by-product of the current slowdown in global IPOs. We need to act now, and act fast, to put the wheels in motion on the promises made by industry groups such as the Digitisation Taskforce and the Capital Markets Industry Taskforce.

Recent reforms demonstrate renewed efforts to incentivise tech firms to list on the London Stock Exchange, but we need to embrace digitisation if we want to fully restore the UK’s reputation as the world’s most competitive global financial centre.

Chatsworth

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