The stark reality of the London Stock Exchange’s exodus
So far 2024 has not – it is safe to say – been a vintage year for the London Stock Exchange (LSE).
Barely a week goes by without news of another foreign or private equity swoop on one of Britain’s listed companies, or a frustrated boss suggesting they might swap their firm’s primary listing to a market abroad.
Now, new data from investment bank Peel Hunt shared exclusively with City A.M. lays bare the full extent of the exodus.
London looks set to lose flagship names like Darktrace, Paddy Power-owner Flutter, and, just this week, Royal Mail’s parent company IDS, due largely to valuations in the UK remaining stubbornly low relative to the country’s peers for consecutive years.
Even more concerning is the fact that all three of the firms mentioned departed the stock exchange in different ways. Darktrace was taken private by the US private equity firm Thomas Bravo in March.
And earlier this week, Royal Mail owner International Distribution Services (IDS), was bought out for £3.57bn by one of its main shareholders, Daniel Kretinsky, in a move that valued the delivery firm at over £5bn.
Other big names to have bid London farewell include the affordable travel agent TUI and FTSE 100 paper giant DS Smith. And in a cruel twist of fate, even Hargreaves Lansdown – a firm that has helped open up the London Stock Exchange to so many retail investors – looks like it might be heading into private hands, after a consortium of private equity outfits bid £4.7bn for the investment services firm.
New data shows scale of exodus
The numbers from investment bank Peel Hunt reveal the stark scale of the exodus from London markets.
At least seventy-five companies have either left or are close to leaving the LSE already this year. Of these, 20 are in the FTSE 350, eight are Smallcap, 37 in the AIM growth market, and 10 in the LSE’s other exchanges.
That represents a total of £94bn leaving London exchanges. The vast majority – £84bn – of that value is held in firms listed on the FTSE 350. Then there is £1.9bn in Smallcap outfits, £8.3bn in AIM growth stocks and £600m in other markets.
Commenting on the numbers, Charles Hall, Head of Research at Peel Hunt, told CityAM: “The exodus of companies from London is the reason we’re pushing so hard on reforms. A thriving domestic market isn’t just a ‘nice to have’, it’s essential for economic growth.
“We need to encourage UK investment in UK companies whichever party is in power. Crucial elements are to encourage pension funds to materially increase investment into both UK equities and private markets, to establish a UK ISA for retail investors, and to cut stamp duty on shares to ensure London is competitive with international markets”.
Hall added that his firm’s analysis suggests that if the current rate of departure maintains, the FTSE Smallcap index could cease to exist as soon as 2028.
Assuming all the deals in the bank’s research go through from the smaller firms’ index, it would represent a fall from hosting 114 companies at the end of 2023 to just 94 today. This in turn is a fall from 160 five years ago.
Extrapolating this “run-rate” into the future, it would take just four years for the Smallcap Index to be completely gutted (excluding investment trusts).
What is behind the mass departures?
Any entity as old as the London Stock Exchange will have experienced its fair share of turbulence. The stock market can trace its roots as far back as the 17th century coffee houses when entrepreneurial money men would compile and relay stock and commodity prices.
But the current issues for the LSE, which is under the auspices of the London Stock Exchange Group, are chronic and widespread.
Criticism mostly centres around the low valuations that plague London markets. Firms listed on competing exchanges like New York’s S&P 500, Frankfurt’s DAX and Amsterdam’s Euronext have tended to have higher market caps, even when their fundamentals look similar.
Lower share prices affect a firm’s ability to raise capital from shareholders, which in turn makes investment harder, creating a negative virtuous cycle. They also make them ripe for the picking from foreign competitors not weighed down by a London-listing. So discounted are London-listed companies, that recent bids for companies like John Wood Group and Anglo American valued them a whole 50 per cent higher than their stock price did.
Complaints have also been made about the burdensome administration required by UK regulators. This is particularly salient complaint among the UK’s smaller public firms, and explains the large number of departures from the AIM market, which include familiar names like Belvoir, Hotel Chocolat and Lock’n’Store.
To firms with fewer resources than FTSE 100 giants, but a not dissimilar volume of reporting and regulatory hurdles, the prospect of going private is especially tempting.
Are things changing?
While the challenges are manifold, optimism can be found in some corners of London markets.
Star stockpicker Nick Train, who manages Lindsell Train’s £3.6bn UK Equity Fund, recently branded UK markets as “pregnant with value and opportunity“. Train joined a string of investment banks, including HSBC and UBS, in predicting that other investors will start to realise just how affordable UK stocks are, predicting an upturn to be on the cards.
The London Stock Exchange itself has said the City is turning a corner as a mood of gloom gripping the market shifts.
“We’ve taken a much more confident position over the last several years in seeking to address some of the misconceptions that exist in the public narrative, and dare I say reporting, which I do believe is now becoming much more nuanced,” its boss Julia Hoggett told a conference earlier this month.
Their optimism is beginning to show in the numbers. The FTSE 100 has hit several all time highs this month, in gains that were made to look even more profound by the slowdown of the S&P500.
Whether that is enough for the UK public markets to permanently break out of their lengthy ennui, however, is another question entirely.