Quiz Clothing is expected to leave the stock market by the end of January
Further action will be necessary to halt the exodus of companies from the London Stock Exchange, says TERRY MURDEN
The year ended with yet another company announcing it was leaving the London Stock Exchange, sending another warning to the City that, despite recent rule changes, it still has work to do. R&D firm DG Innovate’s decision means 88 firms have either delisted or transferred their primary listing away from the main market this year, the biggest net outflow of firms since the financial crisis in 2009.
Next week, shareholders in Scottish fashion retailer Quiz Clothing will almost certainly vote to joint the exodus, cancelling its admission to the Alternative Investment Market, the LSE’s junior trading platform.
These are testing times for the London stock market which, despite recent changes to the rules, is in a do-or-die battle with investors to retain its place. Understanding what companies and investors want is at the heart of the debate.
Both DG Innovate and Quiz complain about a lack of liquidity in their shares which is holding back their growth plans. DG Innovate, a Yorkshire-based company, has struggled to raise sufficient funds to invest in its commercialisation strategy.
It has blamed the prospectus rules and a lack of interest from domestic institutional investors in early-stage firms.
“There has been and remains a broad lack of demand for exposure to companies at DGI’s current stage of development within the UK’s traditional institutional investor base,” the firm said in a New Year’s Eve parting statement.
In a clear rejection of efforts so far made by the authorities to entice companies, the directors added that there were “no obvious near-term catalysts likely to change this backdrop”. The directors added that “the costs, regulatory requirements and additional administrative burden associated with maintaining the company’s listing are now, in their opinion, completely disproportionate to the benefits.”
The firm’s sentiments echoed a statement by Glasgow company Quiz just before Christmas. It referenced the “considerable cost, management time and the legal and regulatory burden associated with maintaining the company’s admission to trading on AIM.”
Assuming shareholder approval, both companies will leave the market by the end of January.
These are worrying developments for the LSE which has seen the number of publicly traded companies on its platform plunge by about 40% from a peak in 2008.
Earlier this month, Ashtead Group, the equipment rental company, became the latest FTSE-100 company to announce plans to switch its listing to the US, following Paddy Power and FanDuel owner Flutter Entertainment, and the Ferguson plumbing business.
A paltry £700 million was raised from eight IPOs on the London Stock Exchange in 2024 – £100 million less than the 11 listings last year.
The bulk of the proceeds were for Kazakh airline Air Astana, the computer group Raspberry Pi, and Applied Nutrition, the sports supplements maker. Only Raspberry Pi has so far seen meaningful upward movement in its share price.
Much of the negative sentiment has been associated with political instability in recent years, in particular the turmoil that followed Liz Truss’s short tenure in Downing Street and which prompted a surge in inflation.
Labour is coming in for severe criticism for reversing promises made in the run-up to the General Election, but its big Commons majority is helping to provide stability and certainty (compared with France and Germany) and the markets have warmed to its plans to encourage pension funds to invest in infrastructure.
Vhernie Manickavasagar, capital markets partner at PwC UK, sees grounds for optimism, with glimmers of a return to normality, signalled by the return of net inflows into UK equities in November for the first time in 42 months and the announcement of larger listings in London towards the end of the year.
“Preparations for a number of significant IPOs are already under way, providing momentum for what is hoped to be a big year for the UK markets in 2025,” she said.
The decision by Vivendi to spin off its Canal+ film and TV streaming business in London may be a sign of things to come. The LSE is hopeful that Shein, the Chinese fashion retailer, will commit to a £50 billion IPO in London.
However, the Issa Brothers, who own Asda, are looking to float their petrol station empire in New York where there is a tendency to get a higher valuation and the listing rules are less complex.
Newcomers are desperately needed in London to replenish those also being lost in a frenzy of M&A activity sparked by perceived low valuations. This year has seen the number of departures three times bigger than the number joining. Buyers identify “cheap” stock and are prepared to pay a higher premium of around 45% to the market capitalisation, way above the more typical 30%.
Notable deals during 2024 were Czech billionaire Daniel Kretinsky’s £3.6bn acquisition of International Distributions Services, owner of the Royal Mail, Aviva’s £3.7bn swoop on Direct Line, Barratt’s tie-up with Redrow, and Nationwide’s £2.9bn takeover of Virgin Money, one of two building society acquisitions of banks. The biggest deal was the £5.7bn paid for FTSE 100 packaging giant DS Smith by the Canadian rival International Paper.
While those in the top index attract the headlines, Peel Hunt believes that smaller companies quoted on AIM are most vulnerable to private equity buyers, particularly from the US, who have plenty of “dry powder” because of their restraint during the period of high interest rates and are taking advantage of a strong dollar. Among the Aim companies to succumb was Smart Metering Systems, the Glasgow-based company which fell to a £1.3bn takeover by New York based Kohlberg, Kravis Roberts.
While this activity may be helping line the pockets of advisers, it is doing little to solve the underlying problem of too few early-stage companies coming to market.
The Financial Conduct Authority responded to market concern and at the end of July it introduced new rules to make listing simpler and more flexible, and designed to place London on a competitive footing with other major international listing venues, particularly those in the US and the EU. It was the biggest overhaul of London stock market rules in more than 30 years.
The changes came into effect just a few weeks after Labour swept into office and new Chancellor Rachel Reeves said they presented a significant step towards “reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here”.
However, stimulating interest among smaller companies remains a challenge and that will require measures beyond changing the listing regime. Next year marks the 30th anniversary of AIM which was set up to encourage such firms to float but may be due some further tweaking to make it more appealing to growth companies.
At least Ms Reeves has made a positive start in attempting to change the way capital flows around the UK. Investors, and the companies they back, will want to see these tentative first steps supported by meaningful incentives that encourage and underpin research, the ability to hire top talent and a trading environment unhindered by regulation.
Terry Murden was Editor and Business Editor at The Sunday Times Scotland, Business Editor at The Scotsman, and Business and City Editor at Scotland on Sunday. He is now Editor of Daily Business.
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