How London’s new stock exchange hopes to solve the IPO ‘cliff edge’
There are few more nervy moments in the life of an entrepreneur than standing atop the balcony of the London Stock Exchange, ringing the figurative bell and handing their pride and joy over to the whims of the public market.
Speaking at a conference, London bourse boss Julia Hogget recalled the founders of money transfer firm Wise being “visibly moved” as they floated their company in 2021. So too were the chiefs of fintech firm CAB Payments as they shifted their company onto the public markets last week, she said.
However, for Hoggett, that emotion is the symptom of a problem.
“You should not have such a cliff-edge event for a company [Wise], where this was a 10-year-in-the-making realisation of any value by those individuals,” she said.
Now, Hoggett and the London Stock Exchange have set out to create a novel world-first solution to that.
The LSE is targeting the launch of a new ‘Intermittent Trading Venue’ next year which will function as a sort of hybrid private and public stock market. In theory, it will provide a venue for firms to trade their shares periodically and privately, rather than leaving a chunk of their company exposed to the fickle swings of the market.
The idea received the full-throated backing from Chancellor Jeremy Hunt on Monday who said the government would now work with regulators and officials to launch the market by the end of next year.
Speaking with City PM, the London Stock Exchange’s head of new primary markets chief Darko Hajdukovic says the venue will essentially look to solve the fault lines in the private sphere using the tried and tested mechanisms of the public markets.
“What we see currently [in the private markets] is fragmented liquidity, we see lack of transparency, we see uncertainty in terms of execution, and uncertainty in terms of timing of execution,” Hajdukovic tells City A.M. “And as Julia says, that huge cliff-edge effect that you are either in a private world or in a public world.”
Under the current plans, firms will be able to opt in to trade shares at a set number of auctions every year. Importantly, the new venue will be only a secondary market, meaning firms cannot issue new equity to investors. Employees, investors and other equity holders will be able to cash in shares while not waiting for an IPO, and new bigger investors may be able to snap up a stake in growing companies at an earlier stage.
The plans are part of a slew of measures from the government and the London Stock Exchange to breathe life again into London’s faltering capital markets ecosystem. But the move is also a strategy play for the under-fire bourse.
The IPO market has had its own cliff-edge over the past year as founders pull back from a historically volatile time globally. Just 18 firms raised a total of £593m in the first half of this year according to EY’s latest IPO tracker – roughly the same as last year but well below the record levels of 2021 when 47 floats in London raised £9.4bn in the first six months.
“We’re cognizant of the fact that IPOs are getting delayed, maybe even not happening,” Hajdukovic adds. “Private markets have grown [and] they’re here to stay, and we would like to have an offering both in the private space […] but also in public space.”
Hajdukovic says the exchange has already received interest from around the world with firms lining up to trade on the market. Those companies are from across industries, he adds, with a particular focus on the scale-up tech firms that many fear are fleeing the UK for overseas in search of capital.
While Hajdukovic says the plan won’t be to funnel firms towards the main market, lawyers think otherwise.
“It should increase the familiarity of UK private companies with the London market which may be helpful when it comes to considering listing venues,” says Chris Haynes, a partner at law firm Gibson Dunn.
Haynes tells City PM that his firm is “already receiving enquiries from private company clients who are interested to learn more” about the market.
Some have been less full-throated in their support. London already has two junior exchanges for smaller listed firms in the LSE’s own AIM market and the Aquis Stock Exchange, both of which are deemed ‘unlisted’ for tax rules. The new venue could have the effect of unintentionally crowding out the existing offer.
“The [Chancellor’s Mansion House comments on] establishing “an entirely new kind of stock market that allows private companies to access capital markets without floating on a stock exchange” [are] intriguing, not least because AIM companies are regarded as unlisted for tax purposes and there is no free-float requirement for companies traded on AIM,” says Jason Hollands, managing director of BestInvest.
“It will be interesting to find out further details in due course and consider whether this could have any unintended impact on AIM.”
The key difference London Stock Exchange officials will be keen to carve out is the new venue’s periodic sales rather than the relentless grind of daily trading.
But as Hajdukovic is quick to caveat, the new Intermittent Trading Venue is a work in progress. As scrutiny intensifies and the strains on the IPO market continue to grow, pressure will be on the LSE to provide concrete answers or risk firms pulling away from the cliff-edge entirely.