London’s Top Investors Warn on Post-Brexit Easing of IPO Rules

Some of the biggest buyers of U.K. shares have a warning for officials weighing one of the most radical shakeups of the London stock market’s rules in years: not so fast.

Asset managers are urging caution as the government considers easing the path to public markets for startups to help post-Brexit London compete with rival financial hubs like Amsterdam and New York. The industry, which oversees about 1 trillion pounds ($1.4 trillion) in U.K. equities, wants to ensure that investor rights aren’t eroded in the push to attract the next Tesla Inc.

“Although it might seem positive in the short term, in terms of attracting some of those names, we’re very cautious about any breakdown in governance standards,” Louise Dudley, a portfolio manager at Federated Hermes, said on Bloomberg TV last week. “Certainly we wouldn’t want to see too much relaxing, too much giving away some of those rights which we think are important.”

Universities Superannuation Scheme, the largest private pension manager in the U.K. with assets of 82 billion pounds, has warned against a “race to the bottom” on listing standards that could weaken investor protections. The global co-head of equities at $402 billion fund manager Janus Henderson Group Plc says that while some rule changes are overdue, they oppose proposals that would compromise shareholders’ voting rights.

The Investment Association, the main U.K. industry group for asset managers, has also raised concerns about potential dilution of the rules, saying that the country’s “world-leading governance and stewardship standards” are essential to the long-term success of its stock market.

Investors’ calls for restraint are at odds with London Stock Exchange Group Plc, which is pushing the government to ease the path to public markets for startups. Jonathan Hill, a former European Union financial-services commissioner, conducted a review of the rules and is expected to issue recommendations for potential changes early this year.

The proposed overhaul comes at a tricky time, with London still reeling from the aftershocks of leaving the EU. Amsterdam overtook London as Europe’s largest share-trading center in January after Brexit saw about half of the city’s volumes move to the continent. Billions of dollars of derivatives and even carbon-emissions trading are leaving town.

The review is part of Chancellor of the Exchequer Rishi Sunak’s efforts to develop the financial-services industry, which employs more than 1 million people in the U.K.

Initial public offerings in London have been waning for years. The average annual number of new listings has more than halved since the last financial crisis, Bloomberg data show. Still, this year is off to a busy start, with London accounting for nearly half of listings announced so far in Europe.

London’s Top Investors Warn on Post-Brexit Easing of IPO Rules

One issue at the heart of the debate is the so-called free-float rule, which requires companies to list at least 25% of their shares. In his call for feedback on potential changes, Hill said this could deter some companies from going public on concerns over diluted control or missing out on post-IPO price gains. LSE Chief Executive Officer David Schwimmer has said the level is too high, and many other markets take a “very different approach.”

Another key issue is the listing of shares with different voting rights, known as dual-class share structures, which are popular in the U.S. and used by the likes of Google parent Alphabet Inc. and Facebook Inc. U.K. rules for the LSE main market’s premium segment don’t allow this practice, which can leave some shareholders with no voting rights.

USS opposes changing either rule to ensure the “principle of one share, one vote is protected.” Rather than alter the rules to accommodate tech and science companies, the U.K. could create a new category for them, the firm said in its response to Hill’s call for feedback. The U.K. created a new category for state-controlled companies three years ago as part of an attempt to lure Saudi Aramco to its stock market.

The rule on dual-class shares is the one “we are least keen to see loosen,” Alex Crooke, global co-head of equities at Janus Henderson, said in an interview.

“It’s one of the rights we’d like to maintain -- the ability to represent ourselves at the AGM and have a say on a company’s issues,” he said. “Sure, owning share classes that have no voting rights comes at a discount, but it just means you don’t have a seat at the table.”

©2021 Bloomberg L.P.

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