• Eirini Efstathiou

The future of the City of London: dual-class shares, IPOs and 'Tech unicorns'

Brexit brought tumultuous waves to the share trading market of The City of London. What used to be the buzz and talk of equity trading, serving as the leading market for stocks and derivatives in Europe, got sharply ousted by Amsterdam in early 2021. Now Chancellor of the Exchequer, Rishi Sunak, faces a challenging puzzle to solve; how to bring liquidity back to the London market and overtake Amsterdam, and reign once again as #1 on the pedestal. Is there light at the end of the tunnel for the City of London?


Via The Times / Andy Hall (@Andyxhall) Eyevine


In January 2021, an average of €9.2bn shares a day were traded on Amsterdam’s Euronext and CBOE Europe’s Dutch limb, while trading in London fell to €8.6bn. This loss was prompted by Brussels having not granted the UK equivalence for its supervisory rules on its exchanges and trading venues. As a result, deals got shifted from London, which served as Europe's main financial hub for decades prior to Brexit, to Amsterdam. Amsterdam soon became an early winner of Brexit, picking up activity in both share trading, as well as in euro-denominated swaps and sovereign debt markets.


With the grant of blanket equivalence not yet in sight, and hopes of reaching one fading, the Chancellor of the Exchequer, Rishi Sunak, has turned to other mediums to attract liquidity to the City of London. On a swing at carving a ‘niche’ by declaring London as a hub of global finance, Sunak’s first trial run morphed into the introduction of ‘dual-class’ shares.


Dual-class shares and IPOs


A recent report by former EU commissioner Lord Hill has indicated a number of recommendations to make the City attractive for international companies. The purpose of the recommendations is to, among others, encourage investment in UK businesses, support the development of innovative growth sectors, such as tech and life sciences, and benefit companies who choose to float in London.


There have been indications that the main strategy with which Rishi Sunak is planning to take the City forward involves ‘luring tech unicorns’ to go public in London (discussed further below). Following Lord Hill’s recommendations, during the Chancellor’s Budget last week he indicated that the FCA would be “consulting on [Lord Hill’s] proposals”, to cement “the UK’s reputation at the front of global financial services”.


With the US leading on the scoreboard of attracting start-ups and Fintechs for IPOs, such a ‘cementing’ points to the introduction of renewed rules, which will allow entrepreneurs to retain greater control over their companies when going public. This includes the reduction of free float requirements, and formalising the creation of ‘dual-class’ share structures in the ‘premium listing’ segment of the London Stock Exchange (LSE).


Typically, when a company wishes to apply for primary listing of equity securities on recognised exchanges, such as the LSE in the UK, certain eligibility and disclosure requirements apply, depending on the jurisdiction. Free float requirements refer to the amount of a company’s shares that are in public hands; the current minimum requirement for a premium listing is that 25% of the class of shares to be listed must be in public hands. For a ‘premium listing’, companies must meet the UK’s highest standards of regulation and corporate governance, which can, in turn, allow them to have an increased profile in a highly liquid market, and make them eligible for inclusion in the FTSE indexes. ‘Dual-class’ structures are currently blocked from premium market segments and entry into the FTSE 100.


Dual-class share structures, often considered controversial by some, are particularly prevalent with founder-owned businesses in the US, largely seen with many Big Tech IPOs in recent years. As an example, retail and institutional investors in Facebook own Class A shares, which carry one vote per share, whereas founder Mark Zuckerberg, executive management, and directors, own Class B shares, which have a 10-times voting right.


The updated rules could attract founder-led companies to list in the UK, by allowing tech founders to retain control, even if they only have minority stakes in their businesses. Anxious tech start-up founders may be able to hold a special class of shares which can confer more voting rights - and thus control - over their start-ups, while still having the option of a premium listing. These changes could see ‘tech unicorns’ with dual-class shares being admitted to the LSE’s premium list, and the FTSE 100, FTSE 250, and other indexes.


Tech Unicorns: Deliveroo and The Hut Group


In finance, these so-called ‘tech unicorns’ include privately held start-ups that are valued at over $1bn, such as Bytedance (TikTok), The Hut Group, and Deliveroo. Although the UK’s start-up scene has flourished over the past five years, a large number of start-ups fail to achieve their potential, as they reach a plateau and then go under. As a result, policymakers have been looking for ways to help entrepreneurs break through growth barriers.


With Trustpilot, the ratings platform, planning a flotation that will give it a value of £1bn, Deliveroo recently confirmed that it is also seeking a London listing on the stock market, expected to value the company at around £7.5bn. Although the IPO comes before the new proposals come into fruition, the relaxation of listing rules is said to have been a major factor in founder Will Shu’s decision. The unicorn’s decision to float in London is also expected to attract others in its wake, boosting Rishi Sunak’s plan to increase the UK's attractiveness further.


Manchester-based online beauty retailer, The Hut Group, which floated last year, adopted a ‘dual-class’ share structure, and as a result, was blocked from premium indexes. The structure included ‘golden’ shares, which allow its founder, Matthew Moulding, to block hostile takeovers. The reasons for which ‘dual-class’ share structures have been criticised largely include that they allow the founders of firms, including Facebook as discussed above, to run ‘public’ companies like their personal fieldoms [1]. On the other side of the spectrum, tech founders prefer the dual structure to allow them to make long-term strategic decisions in their often ‘young’ and fast-growing businesses, without being held back by investors’ short-term demands.


Gunning for a ‘Fintech hub’ title


The end of February 2021 also saw the release of the Kalifa Review from HM Treasury, conducted by former Worldpay CEO Ron Kalifa OBE, in which key recommendations are made on investment in the UK Fintech sector. The Review put forward suggestions whose purpose is to drive economic growth and ‘represent the future for innovation in financial services', allowing the UK ‘to be at the heart of that growth and retain its place as a global financial centre’ [2].


The report prompts for regulatory renovations to push London at the top of the financial – and most importantly Fintech – pedestal. Among the key recommendations the review makes are: (1) Developing a comprehensive strategy for Fintech; (2) Implementing a ‘scalebox’; (3) Adopting policies that create a supportive environment; (4) Embedding Fintech within future trade agreements.


Noteworthy points raised include a general push in creating ‘technology-neutral’ regulations, and encouraging domestic institutional investors to turn their focus on Fintech. Having recognised the importance of investments in the Fintech start-up sector, the report points to the importance of new tax reliefs to be introduced both for Fintechs, as well as financial incumbents who invest in Fintechs, and further promote growth and integration.


Most importantly, the Review points to the large disparity between LSE global IPO listings sitting at 4.5%, compared to NASDAQ’s and NYSE’s 39%. The Review backs Lord Hill’s recommendations for the introduction of ‘dual-class’ share structures, as a way for the UK to capitalise on the current momentum in the tech IPO market, and ensure that upcoming IPOs occur domestically.

Conclusions


In a push to take proactive steps in shaping the future of the City of London, wheels of activity are turning at high speeds behind closed doors. The UK is aiming to declare itself the hub for Technology, and Finance, and it is planning to take a step forward through widespread consultations, and adopting strategic thinking. Nonetheless, to avoid irreparable damage, the City will have to act fast, before its future presence diminishes to irrelevance amongst the big blocs of the US, EU, and China.

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