London calling

Reports of the death of UK equity capital markets have been greatly exaggerated. While the London market certainly faces serious competition from overseas, the tide is turning on the City declinism of recent years amid a series of co-ordinated efforts from UK government, regulators and the London Stock Exchange (LSE) to boost London’s appeal and attract and retain listings, with more on the reform agenda in 2025. We look at the key issues and steps being taken to strengthen UK capital markets and the extent to which they will improve London’s ability to compete in 2025.

Regulation of listed companies

Last year the FCA introduced the most significant changes to the listing regime since the 1980s. In particular, it removed eligibility criteria that previously deterred companies from listing - such as requirements to demonstrate a revenue-earning track record and restrictions on dual class share structures – which should help attract high-growth tech companies, especially from the UK’s thriving fintech sector. In addition, listed companies no longer need to obtain shareholder approval for related party transactions or significant transactions, making it easier for them to compete for desirable assets against private companies, PE funds and companies listed overseas. Regulation of UK Main Market companies is now broadly aligned with other major exchanges.

In 2025, there are further changes on the horizon. As part of changes to the UK prospectus regime, the FCA will raise the threshold at which a listed company needs to publish a prospectus when doing a secondary capital-raising from 20% to, most likely, 75% of a company’s share capital. In principle, this will make it quicker and cheaper for listed companies to raise large amounts of follow-on capital. We also expect progress implementing other recommendations made by the Secondary Capital-Raising Review, such as shortening the period during which a rights issue or open offer must be open for acceptance and reducing the minimum notice period for an EGM.

These regulatory changes are helpful but, in order to increase the amount of capital available, structural changes are needed, particularly among UK pension funds. There is also growing recognition that investors and regulators need to be prepared to accept more risk.

Availability of long-term capital

The UK reportedly has the world’s second largest pool of pension capital, but regulation and risk-aversion over the last 25 years have driven pension schemes to shift capital from equities to bonds, and from UK to global investments. As a result, UK pension schemes now have less of their assets allocated to domestic equities (around 4.4%) than most other countries (the global average is around 10%).

As a first step towards unlocking more pension capital, in 2023 many of the UK’s largest DC pension schemes signed the “Mansion House Compact”, committing them to allocate at least 5% of their default funds to unlisted equities by 2030. In 2025, the UK government will take forward plans to consolidate DC schemes and the £360bn Local Government pension scheme, which is fragmented into 86 individual funds in England and Wales, into a series of “megafunds” that the government hopes will unlock billions of investment in British infrastructure and high-growth companies. Having fewer, larger schemes should make it easier for them to employ more diverse investment strategies and take more risks, including by investing more in private companies. In turn, this should encourage home-grown companies to stay and list in the UK. Schemes will also be encouraged to focus more on net returns rather than costs. To attract more tech companies to go public, schemes will also need to be willing to focus more on prospective capital growth and less on dividends. But mandating private sector schemes to allocate a minimum proportion of their assets to domestic equities, as has been tried in some countries, seems unlikely to occur.

Retail investment

Although changing UK culture around investing will take time, there is growing recognition that individuals need to save more for their retirement. In order to obtain returns that keep pace with inflation, individuals need to invest in risk assets like shares. Reforms are likely to be brought forward in 2025 to make it easier for investment firms to provide advice and guidance to retail investors. Other regulatory changes will widen access to investment research, and developments in technology will make it ever easier to buy shares in specific companies and investment funds. Over time, this will help increase the amount of capital available in public markets.

Executive remuneration

UK companies increasingly find themselves competing for executive talent against global peers. Comparisons with the US are particularly stark, with recent data showing that the median pay for CEOs of S&P 500 companies in 2023 was more than three times that of a FTSE 100 chief executive.

But there are signs of investors in UK companies becoming willing to accept more competitive remuneration packages. During the 2024 AGM season, several large UK companies managed to obtain shareholder approval for more generous remuneration policies. In October, the Investment Association (IA) updated their Principles of Remuneration: the new version emphasises that companies can depart from the Principles if the circumstances justify it. The IA also acknowledges that “hybrid” Long-Term Incentive Plans (LTIPs), combining performance shares and restricted shares that require ongoing service but not challenging performance conditions, may sometimes be justifiable. In 2025, we expect executive remuneration to form an increasing part of the conversation about attracting and retaining companies to a London listing.

The draw of the US

While media attention has focussed on companies that have chosen to migrate their primary listing to New York, only a few have in fact done so and all of them are predominantly US businesses for whom the US market make sense. Most companies listed in London have concluded that, at least for the time being, the US grass is not greener, and investors would prefer them to remain here. Uncertainty about whether and when the company may be included in US indices, as well as the increased complexity and cost involved in the process, also need to be factored in.

Although at first glance there is a valuation gap between UK and US markets, a significant proportion of the gap disappears if the US tech giants (who have no real peers in the UK or anywhere else) are excluded and analyses of like-for-like comparable companies have shown that UK stocks are either in line with US peers or higher in 40% of cases. Similarly, in relation to liquidity, if the 79 mega-cap stocks that account for over half of US turnover are excluded, the average large cap daily value traded is only 1.3 times that in London. The £30 billion of capital raised by UK-listed companies to support them through Covid, and recent ECM transactions such as the £7 billion rights issue by National Grid - the largest follow-on transaction in Europe by capital raised - and the £2.4 billion secondary sale of shares in Haleon have proved there is plenty of capital in the London market.

Secondary sales of private company shares

With IPOs having been difficult to execute, we have seen larger private companies seeking to provide liquidity to founders, employees and early-stage investors via secondary sales, often alongside a primary fundraising round. In 2025, FCA will proceed with its proposals for a new “private stock market”, establishing the PISCES regulatory framework to facilitate the intermittent trading of shares in participating private companies in a controlled environment that bridges private and public markets. Loosely modelled on similar facilities in the US, such as Nasdaq Private Markets, the PISCES framework is partly intended to encourage private companies to stay and grow in the UK, and to ease their transition to public markets. To incentivise use, purchases of shares via a PISCES platform will be exempted from stamp duty. We expect PISCES to attract a lot of attention in 2025, with the first platforms likely to become operational in the second half of the year.

2025 forecast

Huge amounts of capital have recently been available in private markets, enabling companies to stay private for longer, and we expect this to continue in 2025. But private market investors typically look for a return within 5-7 years – whereas public market capital is permanent – so investors will always need an exit. Although UK IPO activity this year has again been modest, the principal causes are geopolitical developments and the economic cycle, not structural weakness. As we approach 2025, the traditional benefits of being listed, such as prestige, access to capital, greater flexibility to finance acquisitions and reward staff, and price transparency remain intact.

The end of 2024 saw genuine signs of the UK IPO market returning. In December, Canal+ became the largest London listing since Haleon was spun out of GSK in 2022. Recently we have also seen private equity sponsors coming back to public markets and more actively exploring IPOs as a viable exit strategy, as well as a wave of UK tech companies ramping up their IPO preparations for 2025 or early 2026 in the hope of taking advantage of pent-up demand for new listings.

There is certainly more work to be done on the revival of the UK capital markets, with pension next on the reform agenda for 2025. But often, sentiment is everything, and the stage is set for a comeback in new listings in 2025. London is calling for a good news story.