Exodus from LSE.

 

The string of depar­tures and pro­spect­ive moves from Lon­don under­line the UK’s dif­fi­culty in attract­ing and retain­ing com­pan­ies, des­pite the Brit­ish gov­ern­ment’s attempts to rein­vig­or­ate the City and lure busi­nesses away from rival exchanges. Exec­ut­ives  see the US as an envir­on­ment that embraces higher growth while they lament the lack of interest from UK-based investors in their home mar­ket, par­tic­u­larly pen­sion funds that have increas­ingly shunned Brit­ish stocks over the past two dec­ades. The amount that has been alloc­ated to UK equit­ies has dropped dra­mat­ic­ally over the last 20 years in favour of fixed income, and that raises some inter­est­ing ques­tions. Hold­ings of UK-lis­ted com­pan­ies by Brit­ish pen­sion and insur­ance funds have plunged from about half of their port­fo­lios to 4 per cent over the past two dec­ades, accord­ing to data from Ondra.

This shift in asset alloc­a­tion was partly driven by a significant account­ing change in 2000, which forced com­pan­ies to recog­nise pen­sion fund defi­cits on their bal­ance sheets. UK pen­sion fund hold­ings of fixed income surged from 17 per cent in 2000 to 72 per cent in 2022, the Ondra data shows. Richard Mar­wood, head of UK equit­ies at Royal Lon­don Asset Man­age­ment, said pen­sion reform and incent­ives for invest­ment in domestic equit­ies should be a primary focus for the UK. He added that the Lon­don mar­ket suffered from a «drip, drip, drip» of selling that con­trib­uted to the valu­ation gap with the US, and investors would rather avoid this «leaky bucket» in favour of the «over­flow­ing» New York altern­at­ive.

He added that sev­eral com­pan­ies were pre­par­ing UK pub­lic offer­ings after fail­ing to float in the US through spe­cial pur­pose acquis­i­tions or ordin­ary list­ings over the past two years. «Those busi­nesses, hav­ing real­ised they’re not going to get what they expec­ted in the US, are now com­ing back to Lon­don». UK investors are con­sidered more risk-averse and com­fort­able with the tra­di­tional sec­tors that dom­in­ate Lon­don’s indices, such as min­ing and energy, sub­sequently ham­per­ing the UK’s abil­ity to retain newer com­pan­ies in sec­tors such as tech­no­logy and help them grow. They also tend to be overly depend­ent on dividends for returns, lead­ing to under-invest­ment.

«Domestic UK investors have not evolved with the times,» said one senior banker, adding that «once upon a time, Lon­don was the centre for min­ing com­pan­ies glob­ally, but it lost an oppor­tun­ity to evolve when the min­ing sec­tor came down, and tech came up». Com­pany boards are also increas­ingly frus­trated with the scru­tiny of exec­ut­ive pay and what they see as the «box tick­ing» exer­cise over cor­por­ate gov­ernance in Lon­don. Large man­age­ment pay­outs at CRH have been cri­ti­cised by high-pay cam­paign­ers while some investors voted against them. US exchanges have act­ively cour­ted UK com­pan­ies amid dis­sat­is­fac­tion with the domestic mar­ket.

Cas­sandra Seier, head of inter­na­tional cap­ital mar­kets at the New York Stock Exchange, said the exchange under­took a lot of out­reach, speak­ing to bankers and com­pan­ies and that «in par­tic­u­lar in Lon­don, a lot of focus is on bring­ing com­pan­ies to the US». Lon­don’s attract­ive­ness to com­pan­ies and investors is a cent­ral part of recent attempts by the gov­ern­ment to rein­vig­or­ate the City of Lon­don through the «Edin­burgh reforms» that aim to rip up EU rules to make it com­pet­it­ive against rival fin­an­cial centres. To boost Lon­don’s equity mar­kets, the gov­ern­ment will revamp com­pany pro­spect­uses, recon­sider short-selling rules and review invest­ment research. «If any­one was in any doubt that we are in the shit, they should be wak­ing up now at least,» said one gov­ern­ment adviser.

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