The harsh reality of the exodus from the London Stock Exchange

Saturday June 1, 2024 6:00 a.m.

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So far, 2024 has not been – it can be said – an exceptional year for the London Stock Exchange (LSE).

Not a week goes by without news of a new foreign or private equity attack on one of Britain's listed companies, or without a frustrated boss suggesting they could swap their company's main listing on a foreign market.

Now, new data from investment bank Peel Hunt shared exclusively with City AM. lays bare the full extent of the exodus.

London looks set to lose marquee names like Darktrace, Paddy Power owner Flutter, and, just this week, Royal Mail parent IDS, largely due to UK valuations remaining stubbornly low compared to the country's peers for consecutive years.

Even more worrying is the fact that the three companies mentioned left the stock exchange in different ways. Darktrace was taken private by US private equity firm Thomas Bravo in March.

Flutter decided earlier this year that a US listing would not only give its valuation a boost, but also improve its chances of success in its important betting play across the Atlantic.

And earlier this week, International Distribution Services (IDS), owner of Royal Mail, was bought for 3.57 billion by one of its main shareholders, Daniel Kretinsky, valuing the delivery company at more than 5 billion.

Other big names bidding farewell to London include affordable travel agent TUI and FTSE 100 paper giant DS Smith. And in a cruel twist of fate, even Hargreaves Lansdown – a company which helped open the London Stock Exchange to so many retail investors – appears to be on the verge of passing into private hands, after a consortium of companies private equity firm offered 4.7 billion euros for the buyout. the investment services company.

New data shows scale of exodus

Figures from investment bank Peel Hunt reveal the scale of the exodus from London markets.

At least seventy-five companies have left the LSE or are about to do so this year. Of these, 20 are in the FTSE 350, eight are small caps, 37 are on the AIM Growth Market and 10 are on the other LSE exchanges.

This represents a total of 94 billion leaving the London stock exchanges. The vast majority – 84 billion – of this value is held by companies listed on the FTSE 350. There is then 1.9 billion in small cap companies, 8.3 billion in AIM growth stocks and 600 million in d other markets.

Commenting on these figures, Charles Hall, head of research at Hunting for skinssaid City AM: “The exodus of businesses from London is why we are so insistent on reforms. A thriving internal market is not only a benefit, it is essential for economic growth.

“We must encourage British investment in British businesses, regardless of which party is in power. Crucial elements include encouraging pension funds to significantly increase their investment in UK shares and private markets, establishing a UK ISA for retail investors and reducing stamp duty on shares to ensure London is competitive on international markets.

Hall added that his firm's analysis suggests that if the current exit rate continues, the FTSE Smallcap Index could cease to exist as early as 2028.

Assuming all deals studied by the bank come from the small business index, that would represent a drop from 114 companies at the end of 2023 to just 94 today. This is down from 160 five years ago.

Extrapolating this “run rate” into the future, it would only take four years for the Smallcap index to be completely emptied (excluding investment trusts).

What is behind these massive departures?

Any entity as old as the London Stock Exchange will have seen its share of turbulence. The stock market traces its roots as far back as the coffeehouses of the 17th century, when entrepreneurial moneymen compiled and relayed stock and commodity prices.

But the current problems at the LSE, which is part of the London Stock Exchange Group, are chronic and widespread.

The criticism mainly focuses on the low valuations plaguing London's markets. Companies listed on competing exchanges like New York's S&P 500, Frankfurt's DAX and Amsterdam's Euronext tend to have higher market capitalizations, even when their fundamentals appear similar.

Declining stock prices affect a company's ability to raise capital from shareholders, making investment more difficult, creating a negative virtuous cycle. They also make them ripe for selection by foreign competitors who are not weighed down by a London listing. London-listed companies are so discounted that recent takeover bids from the likes of John Wood Group and Anglo American value them 50 percent above their share prices.

There have also been complaints about the administrative burden required by UK regulators. This is a particularly prominent complaint among the UK's smaller public companies and explains the large number of departures from the AIM market, which includes household names like Belvoir, Hotel Chocolat and Lock'n'Store.

For companies with fewer resources than the FTSE 100 giants, but quite similar reporting volume and regulatory hurdles, the prospect of going private is particularly tempting.

Are things changing?

Although the challenges are numerous, optimism reigns in certain corners of London's markets.

Star stock picker Nick Train, who manages Lindsell Train's $3.6bn UK equity fund, recently described UK markets as “a precinct of value and opportunity”. Train joined a string of investment banks, including HSBC and UBS, in predicting that other investors would start to realize how affordable UK stocks are, predicting a recovery ahead.

The London Stock Exchange itself said the City was turning a corner as a sense of gloom gripped the market.

“We have taken a much more confident stance over the last few years in seeking to dispel some of the misconceptions that exist in the public narrative, and dare I say, the reporting, which I believe is now becoming much more nuanced,” said his boss, Julia Hoggett. conference earlier this month.

Their optimism is starting to show in the numbers. The FTSE 100 has hit several all-time highs this month, with gains made even deeper by the slowdown in the S&P500.

However, whether this will be enough to bring UK public markets out of their long woes for good is another question entirely.