London for FinTech IPOs: strengths, weaknesses, opportunities, threats

What can we do to make the London Stock Exchange the default listing venue for UK FinTech?

By Rolf Merchant, Head of Public Affairs at Innovate Finance

“MARKET OPEN”. 

Two words on big screens behind a group of smiling and applauding executives. It’s an image that encapsulates success, progress and the promise of more to come from a company that is making its debut as a listed company. 

A growing number of rapidly scaling UK FinTech companies are going to list in coming years. Many will be hotly debating when they should kick off the IPO process. 

But “when” is only one question they are asking. “Where” is equally pertinent. 

The LSE is in stiff competition with other listing venues across the world, particularly NASDAQ and NYSE, to attract FinTech companies to IPO.  

We have consistently engaged with players across the FinTech ecosystem to explore how we as industry, regulators, and government can best position London as the listing destination of choice for FinTechs from around the globe. 

The Kalifa Review, for which Innovate Finance served as the co-secretariat, made a number of key recommendations in this area. We have been pleased to see good progress being made.

Over the past few weeks, we have spoken to many of our members about how we can further cement London’s already strong position, and several themes have become clear.

The LSE has huge strengths. It remains one of the leading listing venues globally, with high standards and deep liquidity, as evidenced by the £14bn capital raised in IPOs in 2021. 

Listing is a complex process; professional support is a must have. Here, the UK can boast a truly world-class ecosystem of professional services to guide and advise companies through the IPO process. 

Tech CEOs point to half-yearly reporting as a significant advantage the LSE has over the New York Stock Exchange (NYSE), which requires quarterly reporting. This is very attractive to tech CEOs who prefer to focus on building their businesses.

Importantly, recent and ongoing reforms to the listings rules - kick-started by Lord Hill’s Review and the Kalifa Review of UK FinTech - will help to make the LSE much more competitive, particularly with the US. The UK Government and regulators have taken quick and decisive action to implement these reforms. The creation of a “golden share” for founders, reduction in the minimum free float requirement, now make the LSE more attractive for founder-led businesses and a current review of secondary capital raises and pre-emption rights will take this further.

These are undoubted positives, but we must also be alive to areas where we can serve to strengthen the LSE’s competitiveness, which UK policy makers, institutional investors and the City have to mitigate. 

For example, the fact that the US simply has deeper pools of liquidity and is simply a bigger market.

Investor attitudes in the US tend to be more attuned to growth companies. The LSE is a dividend-earning exchange; some of our members have argued that it does not reward growth and risk-taking in the same way the NYSE does. This growth frame of mind is absolutely essential for tech, and so we would welcome a shift in sentiment towards growth companies from domestic UK investors.

It is often observed that UK stock market investors tend to take a short term view compared to US investors, leading to lower valuations and lower demand for FinTech or tech IPOs in the UK versus the US. While just 5% of public European tech companies valued over $1 billion and founded pre-2000 are listed on US exchanges, this is up 7x to 36% for companies founded after 2015.

There is also a phenomenon that occurs shortly before a company is ready to IPO. US funds tend to dominate late stage growth capital raises: around 80% of VC funding deals over $100m in European tech in 2021 had at least one US investor. The lack of large UK funds makes this somewhat inevitable. The tendency is for those US funds to then push founders to IPO in the US. 

Many members also mentioned to us that, in the US, there tends to be a greater focus on growth projections and story, while the UK media can often be more harsh or cynical about tech company growth and founder-led IPOs. 

In addition, there are some potential threats to the LSE’s global leadership which it is important to address.

Other European exchanges are chasing London for IPO leadership: Stockholm saw £9bn funds raised in 2021, Amsterdam £7bn, and Frankfurt £7bn. Of the combined market cap of European tech companies, 38% of that market value is attributable to companies listed in Amsterdam, whereas London ranks 6th with only 6%. 

The EU has launched a Listings Consultation to dramatically accelerate work on competitiveness. No individual European exchange is particularly competitive with the UK for FinTech businesses at the moment, but this may change if the EU was able to deliver true cross-border investment access..

Looking further ahead, it is possible to see US exchanges hosting the IPOs of both UK FinTechs and international FinTechs if the UK investor base doesn’t provide adequate support for IPOs. Or, UK FinTech companies may avoid the IPO route altogether, choosing to sell out to non-UK buyers in M&A deals. 

If founders are to continue choosing the UK as the best place to start, scale and grow a FinTech business, we need to ensure the UK offers a strong IPO exit route.  

The good news is, there are many opportunities for the LSE to become even more attractive for FinTech listings.

The LSE already has a strong offering for companies to list on AIM and could use this to attract more FinTech business that can then move to the main market. To highlight this, £4bn was raised in 2021 on the AIM in 87 deals across all sectors.

One particular reform highlighted in the Kalifa Review - the creation of a global family of FinTech indices - would be a great step towards improving understanding and enhancing visibility of the sector. It will bring the added benefit of attracting index tracking funds, now 37% of the market. 

Government, politicians of all parties, business figures and media influencers can also continue to build on opportunities to publicly engage with and celebrate UK success stories, which will then be amplified by the media. 

London needs to have even more successful tech IPOs, ones that defy expectations, which will in turn create an emotional connection to inspire others to follow. 

This could help drive a network effect benefit to building a track record for London as the FinTech IPO venue of choice, not just for UK companies, but for international FinTechs as well. We have seen this across other sectors before, with theLSE being the go-to listing venue for international companies across sectors for decades. For example, in the oil and gas sector, 35% of listings are for non-UK companies. 

The overall market impact of successful FinTech IPOs in London could be considerable. We can imagine a scenario where more IPO success fosters greater interest in UK FinTech, and more investment in all stages, as the exit path becomes clearer to founders and investors.  

This is the ultimate prize: IPO success breeding a virtuous cycle of more innovation (which ultimately serves to benefit the end client and consumer), more investment, more growth and more IPO success in the future. 

We should not forget the UK remains a global leader for investment in financial technology, with a record $11.6 billion capital raised by UK FinTechs in 2021 alone. This is a great story to tell.

The UK government and regulators have made great progress implementing the recommendations of the Hill Review and Kalifa Review – cementing London’s position as one of the most attractive places in the world to start and scale a business and take it public.

There is more work to be done. ​​We need more UK institutional investors to take a longer-term view and focus on growth opportunities here in Britain. We can all do more to celebrate UK FinTech businesses, promote the benefits of investment and continue to support the world-leading ecosystem we’ve built over the past decade. 

Now is the time for us to grasp the opportunities to even further improve London’s IPO market for FinTech, or risk losing it for good.