Some of the recent trends we have witnessed have been accelerated by the pandemic, and others can even be said to be a direct result of it. It remains to be seen which trends are here to stay for the longer term, especially as we await the outcome of consultations on various aspects of the listing regime, but we set out our picks and predictions below.
H1 saw IPOs across a range of sectors, with a raft of technology-focused listings (including digital services, fintech, biotech and e-commerce) fuelling optimism for a new direction for the UK markets.
Premium v standard
Standard listings emerged as a popular option in 2020 with 66% of Main Market IPOs, introductions and transfers from AIM, comprising a listing on the standard listing segment as opposed to the premium listing segment. This included 2020's largest IPO: The Hut Group plc. In H1 2021, this trend has slowed down, but more companies still opted for a standard listing than a premium listing. Standard listings are currently under the spotlight following Lord Hill’s UK Listing Review report which recommended a rebrand and re-positioning of the standard listing segment (see below) and the subsequent FCA consultation on the effectiveness of the primary markets which discusses four possible models for the listing regime. This review is shaping up to be quite far-reaching in potential scope: in the interests of being globally competitive, some players on the sell-side are pushing for a single segment closer to standard listing; on the buyside there are some vocal advocates for the "gold standard" status quo. Whilst we do not yet know what the new listing regime will look like, it is likely that the popularity of standard listings will continue to stall until we have clarity on the new structure. The FCA hopes to announce the new rules by "late 2021".
UK v overseas issuers
In H1 2021, over two thirds of the Main Market issuers have been UK issuers, the rest being from the Channel Islands, the Isle of Man, Australia and the BVI. Similarly, 18 out of the 23 AIM IPOs have featured UK issuers, with the others being from Ireland, the US, Canada and Jersey. It is hoped that the new rules resulting from the consultations referred to above will increase the number of overseas companies listing in London. With Brexit prompting a fresh examination of the UK listing regime (and, in particular, a drive to tailor it to meet the needs of the UK market), and in the wake of critics accusing London of having lost its appeal, we are likely to see a radical shake up of the prospectus and listing regimes following the recent FCA and HM Treasury consultations.
SPAC down to earth
In the first quarter of 2021, global IPO activity was fuelled in large part by the continuation of 2020's US SPACs boom. The money raised by SPACs in that quarter was more than 60% of that raised in all of 2020 when SPAC IPOs represented over 50% of the total number of IPOs. In the second quarter, there was a sharp decline in US SPAC activity but proportionally a vast increase in European SPAC activity (from a tiny base). The European SPAC rally lasted into July.
Of the 27 European SPAC listings in the last 12 months, over half have listed since June. The late surge in European SPAC listings has partly been driven by demand, but more driven by the length of time it has taken to get European regulators to approve prospectuses for these vehicles. That pushed Q1 deals into Q2 and early Q2 deals into closing just at the start of the summer.
The headwinds which have stalled SPAC fundraising in the US (recent poor share price performance after recent deals and increased scrutiny on the part of US regulators, which have suggested some SPACs have not accounted for their warrants correctly and queried the use of forecasts for future earnings) do not apply to the European markets. That said, the fact that some of the recent fundraises look to have been at the bottom of the target fundraising size implies that the US boom has not been exported to Europe.
Unlike the US, the UK has never really had a set of rules which applied purely to SPACs, but the FCA had longstanding guidance that required trading in SPAC shares to be suspended once a de-SPACing transaction is announced. The mere fact that trading might be suspended prevented the typical US-based SPAC investors from investing in a London-listed SPAC as the financing arrangement which those hedge funds use require that the shares they acquire remain traded (or, more precisely, that the collateral they are required to post against untraded shares they hold is significantly greater than that which they typically post). The AMF in Amsterdam had given the opposite guidance, hence why in this recent wave of SPAC listings, Euronext Amsterdam has been the most popular market in Europe.
That significant barrier to SPACs listing on the London markets has now been removed for SPACs which meet certain criteria laid down by the FCA: broadly those which raise at least £100 million, hold money raised in a trust or escrow account, require a resolution of shareholders to approve making their acquisition and which have a fixed period of 2 years to do their deal (extendable by six months in certain circumstances). The fact that only certain categories of SPAC should benefit from this change of guidance is illogical, but is fundamentally a policy decision.
The jury is currently out as to whether the change will allow London to join the SPAC rush or if the number of SPAC listings will continue to grow in Europe. If there is a flurry of activity in the autumn, then it could continue to the end of the year. The speed with which SPACs can be established and gain a listing in London as opposed to other European markets could well be the driver for the growth of a London SPAC market.
Environmental, social and governance ("ESG") considerations continue to be a hot topic in 2021, with the rise of sustainable or "impact" investing increasingly taking centre stage. Investors are focussing on sustainability issues while making their investment decisions and demanding more of listed companies in terms of their ESG credentials, with a much greater emphasis on sustainable business strategies. Issuers are also subject to more stringent ESG reporting requirements. Main Market companies are already required to include reporting in line with the recommendations of the Taskforce on Disclosures ("TCFD"). The FCA has recently consulted on extending these requirements to certain standard listed companies for accounting periods beginning on or after 1 January 2022, and the government intends to widen the scope of such reporting across the economy by 2025, with a significant portion of mandatory requirements to be in place by 2023.
To B or not to B?
There is now a community of over 4,000 Certified B corporations (or "B Corps" for short) across 77 countries. Well known B corps include Helios Investment Partners, TowerBrook Capital Partners, Ella's Kitchen, Innocent, Pukka, Bookshop.org and Patagonia. S4 Capital is also working towards B Corp status. B corps are businesses "meeting the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose", and the aim of a B Corp is to redefine success in business and build a more inclusive and sustainable economy. In order to become a B Corp, a business must undergo an assessment of the impact on its workers, customers, community and the environment. The business must be able to demonstrate that:
- it generates the majority of its revenue from trading;
- it competes in a competitive marketplace;
- it is not a charity; and
- it is not a public body or otherwise owned by the state.
As we are witnessing such a heightened focus on all things ESG, it is not surprising to see B Corps gaining traction: becoming a B corporation is a way for companies to send a strong signal to their stakeholders that having a positive impact is a focus for them both now and in the longer term. For further details, see our client note on this topic.
No (corner) stone left unturned
The recent rebound in UK and European IPOs has brought with it a rise in the prevalence of cornerstone investors, something that has been an important feature of Asian capital markets for many years. Issuers to announce recent UK listings backed by cornerstone investors include The Hut Group, Trainline, Trustpilot, Network International, Moonpig, Dr Martens, Auction Technology Group and Made.com.
Cornerstone investors are typically large institutions which agree to subscribe for or purchase a minimum value of shares as part of a company's IPO offering in advance of the formal roadshow. Bringing such investors on-board allows an issuer to gather real momentum behind its IPO, generating positive sentiment and PR, as well as helping to de-risk the IPO process. Whilst there can be drawbacks to using cornerstone investors, particularly if they are given too large an allocation, in most cases the positives will outweigh the negatives.
Whilst there are broader macroeconomic factors helping to supercharge this emerging trend, as issuers, underwriters and the UK and European market more generally become increasingly familiar with the benefits of cornerstone investors, we expect them to be an increasingly common feature of the UK and European IPO market.
For further details on the advantages and potential risks of using cornerstone investors, please see our briefing note on this topic. It seems that this trend, so far seen exclusively on Main Market deals, is now reaching AIM: Revolution Beauty Group Ltd has recently announced an AIM IPO with Jupiter Asset Management and Chrysalis Investments Ltd as cornerstone investors.
In the first week of H2, the IPO of London-based money transfer Fintech company Wise took place and was notable for two reasons: firstly it was a "direct listing", where no new funds are raised, and secondly, it is the largest ever tech listing in London. Although the US has seen direct listings of some high-profile companies such as Spotify and Slack, this is a significant move for the UK, whose government has been trying to make its markets more attractive for fast-growing tech businesses. Wise also considered Amsterdam and New York but is reported to have decided on London because of the existing infrastructure to facilitate a direct listing and its access to a global investor base.
Although for a long time the LSE has allowed companies to be “introduced” without raising capital, introductions are usually seen only on demergers or secondary listings. A direct listing can be seen as a specialised form of introduction. Wise is the first technology company to have a direct listing in the UK and the largest company in over two decades to come to market without being listed elsewhere or separated from a group.
It remains to be seen whether Wise's direct listing will kick-start a new trend, but we do not anticipate the IPO declining in popularity given its tried and tested status.
For further information, and for the pros and cons of a direct listing as opposed to a traditional IPO, please see our client note on this topic.