London Stock Exchange still alive and kicking

If you had arrived on earth from Planet Zog over the last few weeks, you would be forgiven for thinking that the London Stock Exchange was dying or on its knees.

The headline on one column in the Times said: “The London Stock Exchange needs life-support” with a strap line claiming that “jobs and tax revenue are at risk unless the ailing exchange is revived by relaxing archaic rules.” 

Even lifestyle magazines such as GQ are having a pop. In an interview with Matt Moulding, the Burnley billionaire boss of the Hut Group, the magazine’s headline declared: “THG boss Matt Moulding: The obvious lesson is don’t IPO in the UK.”

Moulding, whose e-commerce beauty to fashion group was one of the biggest IPOs on the London Stock Exchange last year, was moaning about how the experience of floating ‘has just sucked from start to finish.’ 

This may have something to do with the fact that over the last few months THG’s shares have struggled, collapsing since September to 200p a share, valuing THG at only £2.4 billion compared to the £5bn price tag when it floated.

It is no surprise then that Moulding, who is both chairman, CEO and a landlord to some of the group’s properties and owns 25% of the company, is not a happy bunny. Short-sellers – who he likens to bank robbers – also get it in the neck from him and are blamed for marking the shares down in an attempt to make profits. But only 1.2% of THG’s shares are on loan to short-sellers so it is unlikely however much trading they carried out that they would have had any significant impact. 

When asked by the GQ reporter whether he would list again, Moulding says: “Shit, no. No. I wouldn’t. There are very few companies where an individual sets a company up. I’ve done it the right way. I’ve done nothing wrong.” But if he had listed in the US, he claimed, he would have had no profile and no one would have “written on me.” 

If Moulding believes that, then he really does live in a parallel universe as anyone who knows the ruthless nature of the US fund management business will understand. 

Yet Moulding does not even seek to explain in the interview why BlackRock, once the company’s biggest investor and one of the four big funds which acted as cornerstone investors for last year’s IPO, recently halved its stake, sparking the shares to dive to a record low. 

The sale by BlackRock, at a 10% discount to the market price, came after a bumpy few weeks of trading for THG prompted by worries over the firm’s governance, a slow down in its core beauty business and the potential sale of its key Ingenuity software platform to SoftBank. Indeed, analysts are said to have left a recent update with Moulding – who is only now looking for a non-executive chairman – with more questions than answers. 

By Moulding’s own reckoning, would THG’s share price really have fared any better if listed on Nasdaq or the New York exchange? If there were fears that trading is going to be below expectations, would US analysts not have asked him questions? Ironically, BlackRock’s analysts were clearly disturbed by what they were hearing – or not hearing – and voted with their feet by dumping his stock at a discount. 

As anyone who has even remotely anything to do with stock markets will tell you, that’s what investors and analysts do: trade in and out of the shares. 

So Moulding’s criticism of listing in London has more to do with his own governance and communications problems than with London being the place of listing.

The London stock market – despite the Times headline – is not doing as badly as suggested, compared to its peers. It is still the world’s fourth biggest stock market with more than 2000 companies listed with a total value of £4.5 trillion. Last year £43 billion of new capital was raised and this year there have been 109 IPOs. On any measure, the junior AIM market is one of the best growth markets in the world. 

If this is the case, why did Emma Duncan, say in The Times article that the decline of the LSE is so startling? And why did she claim London is no longer attracting enough companies to list, and that its proportion of world equities compared with Asian and European markets is collapsing? 

Her conclusion is that too many of the corporate governance rules are beyond their sell-by date, and that the authorities need to put into place the reforms proposed in the reviews by Lord Hill and tech entrepreneur, Ron Kalifa. 

If not, she warns there will be no companies left to govern. In some respects, Duncan is right to raise the red-flag that the LSE needs reform – all markets need constantly updating – but for the wrong reason and possibly with the wrong solutions.

The LSE is not the only stock market to be experiencing a decline in corporate listings. De-equitisation is  a world-wide trend which has accelerated over the last two decades for a variety of structural reasons. 

Since the late 1990s to early 2000s, the number of listings in the US public markets has fallen by 47%, in France the number collapsed by 62%, in Germany by 37% while  in the Netherlands the number has dived by 74%. 

By comparison, the fall in the number of domestic companies listed on the UK public markets dropped by 44% to around 1650. 

There are three big reasons for why public markets are in decline around the globe.

First, the growth of alternative capital, mainly private capital, through private equity, venture capital, family offices and direct investing. City think tank, New Financial, estimates around 25% of unlisted companies in the UK with revenues between £25m and £500m are owned or backed by private equity or  venture capital.

Then you have the availability of cheap debt, either through corporate bonds or leveraged loans which have mushroomed because of such a long period of low interest rates and – the elephant in the room which we will come back to – the tax advantages of debt over equity. 

At the same time, companies world-wide have been hesitant about expanding or investing at such a fragile time so have masses of cash sitting on their balance sheets. 

There is also the “Sell to Google” factor which has become such a juicy alternative for many companies rather than face the challenges of going public. Over the ten years to 2018, the big tech FANGS between them gobbled up 400 companies.

Second, the heavy burden of governance, regulation and disclosure requirements of going public – as THG’s Moulding is discovering. It’s a perennial issue but the combination of a more short-term approach by many investors coupled with the intense spotlight of being in the public eye and being chased by the media is more than some company bosses can bear – as THG’s Moulding is also finding out. 

Even our politicians are staying away. Once upon a time having a non-executive seat on a FTSE listed company was considered the perfect exit for retirement. Not any more – the spotlight on public companies is just too great. 

On top of this scrutiny, the costs of listing, in money and management time, are enormous compared to a quick trade sale as we have seen this last year with so many private companies being snapped up by the private equity funds. With so much money going into private equity funds, which can borrow debt cheap, there is less liquidity going into smaller companies, setting off a vicious circle. 

Third, and finally, there are more technical issues which have increased the burden of going public such as the high level of regulation for smaller companies while the big funds tend to only trade in the top stocks where there is more liquidity. It’s also so much easier for the big fund managers to invest in the indices than seek out the growth stories of the future. 

Paradoxically, over this same period with fewer listings, most of the world’s stock exchanges have gone from being mutually-owned to listing themselves. One of the unintended consequences of this shift in ownership, and the big bucks raised from listing, is that exchanges have turned themselves into data companies earning big bucks from their indices and post-trade services.

Indeed, looking longer term you could say there is a case for the stock exchanges to hive themselves off into separate companies, or perish the thought, delist. 

If we care about the wider democratisation of capital – and the wider distribution of wealth – then these structural changes really matter and policy-makers need to take note. 

It is only by raising capital through equity which provides companies with the funds allowing them to drive innovation, look to the long-term to build their businesses, driving growth, productivity and therefore wealth. 

While the reforms by Hill and Kalifa, relating to smaller free floats and dual-share class structures will be adopted by the regulators and will improve the ease of listing for some companies, the changes on their own are not enough to invigorate our capital markets.

That sort of heavy-lifting can only be done by allowing companies to have the same tax advantages for raising equity as there are for debt. Interestingly, Belgium is the only country to have done so. In 2006, it changed the rules so that companies raising equity were given a notional interest deduction. Using data from the National Bank of Belgium, a BIS report says that since the NID was introduced, there has been a ‘significant increase’ in the share of equity used by companies.  Brussels, all is forgiven.