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London Calling

tl;dr: There is more to tech stocks than the Nasdaq. London wants a piece.

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Mattermark recently caught up with James Clark of the London Stock Exchange after his article “Mythbusting the IPO Market” caught our eye.

Clark’s piece argued that there were several “myths” surrounding going public in London. Naturally, we wanted to know more. Working in business development covering technology and life sciences, Clark has a good view into the IPO market.

What follows is an email exchange diving into the London markets. If you track IPOs, this is for you.

Mattermark: Your article dealt with where companies should go public but not why. By arguing that companies should consider London, were you implicitly saying that more companies should go public?

James Clark: I wouldn’t be doing this if I didn’t think so. […] The existence of public markets, the diversity of shareholders, and the permanent source of long term equity capital they provide are ideally suited to help those businesses support their long term growth plans.

Perhaps not at the vertiginous rate enabled by venture capital, but consistently into the long term.

Mattermark: In an email, you stressed that for companies with a valuation of $500 million or less, London is a potentially enticing market for listing. Why is that the case?

Clark: AIM, London Stock Exchange’s market for smaller, high growth companies was created to provide the optimum conditions for small and mid cap growth companies—i.e. valuations in the tens to hundreds of millions of pounds.

Because of the scale of the US exchanges, companies at this sort of valuation can struggle to cut through the noise. When they can even get onto market, we have found they can struggle to attract top tier investors, may have to offer deep discounts on their issue price, and run the very real risk of becoming so-called “orphan stocks” lacking adequate coverage from analysts.

AIM has been running for 21 years now, and in that time, it has helped companies raise £95 billion of new capital and developed a regulatory structure designed to provide an appropriate [oversight] for companies at this stage in their development.

Screen Shot 2016-08-09 at 10.44.25 AMIt’s a powerful combination. In the biotech sector, over the last decade, London has seen twice the volume of companies traveling across the pond to IPO than has gone the other way. It may be surprising to some in the US tech world, but we offer the same opportunities for US tech companies.

Stepping onto my soapbox for a minute, with all the focus on massive valuations and hypergrowth, we ignore the importance of smaller businesses. We strongly believe that smaller businesses don’t get the coverage they deserve; they innovate, they provide services, they create valuable jobs and skills, and they contribute enormously to the economy. AIM provides a opportunity to help these businesses grow sustainably.

Mattermark: We’ve seen a dramatically slow IPO market in the United States so far this year. Has that been the case in London as well?

Clark: It has been similar but for different reasons.

Large caps in the US have struggled to get to market because the glut of late stage venture capital in the last few years has created many companies with unusually high valuations that have postponed listing. Combine that with investment practices that came with non-venture investors getting into the game (described by Bill Gurley in his blockbuster post in April) [there are] many companies being forced to sit on the sidelines until public market valuations start to match private valuations.

The situation in the UK (and most of Europe) is different—we’re a little further back in the cycle so bigger companies aren’t quite ready to list. So after securing the top tech IPO with Worldpay in a what was a breakout year in 2015, 2016 has been quiet in London for the larger tech companies. All tech IPOs so far this year have been on AIM and have not been linked to the cycle.

Mattermark: I presume that as you discussed companies with lower market caps potentially favoring the London markets, you are not surprised at the velocity difference between your side of the ocean and here?

Clark: Not really. There will always be attention when the unicorns scent the opportunity for an open market, that’s natural. We continue to work hard to make the case for small and midcap companies to consider a listing, and in time, the European unicorns will look to IPO as well.

Mattermark: London is best known for FinTech—are its markets as open to other sorts of technology companies?

Clark: Fintech gets all the attention of course. Payments company Worldpay was the biggest tech IPO in the world in 2015. Fintech derives from London’s position as global centre of finance, but London is also strong in artificial intelligence (Deepmind, Swiftkey and Blippar spring to mind).

Less than an hour from London (think Caltrain from San Francisco to Palo Alto), you have Cambridge, which is home to thriving centers of biotech, hardware, and artificial intelligence. You also have biotech in Manchester and Oxford, Edinburgh in the north has games (Rockstar, producers of GTA are based there).

The UK is also a world leader in aeronautics. Facebook’s long haul drones are built in the southwest of the UK. Finally given the UK’s heritage in intelligence, cyber[security] is strong here too—Darktrace is a name familiar to many and Sophos was the biggest cyber[security] IPO of 2015.

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Mattermark: Has Brexit made London markets less attractive for a flotation?

Clark: We don’t believe so. London hasn’t lost its attraction as a capital market. It’s still, by far, the most international capital market in the world. Summer is traditionally quiet for IPOs, but autumn looks interesting. We have our first tech IPO due in the next couple of weeks, with London based tech firm, Loopup, due to list on AIM.

Mattermark: Speaking broadly, are companies waiting too long to go public?

Clark: Companies are staying private because they can and because, until very recently, raising private capital was far easier than going public.

Private investors demand different growth in different ways to public investors, and this can be jarring. As I mention in the post, an IPO isn’t for the fainthearted. But ultimately, going public enables a company to grow in a far more sustainable manner.

As you have noted in many of your posts, “winter is here” and that changes the calculus of for tech companies. We’re now seeing a bit of return to normalcy for companies (and investors) when it comes to public markets with even Uber showing signs they may be looking to grow up!

Mattermark: Finally, we’ve seen increased competition between the Nasdaq and the NYSE here in the United States to provide services to companies going public. Is that sort of thing key to companies decision making processes today?

Clark: It’s interesting to see how this is developing. Exchanges are like any business, and they need to improve product beyond the basics in this case, valuation and liquidity at IPO. It’s also an acknowledgement from exchanges that, as our report shows, historical advantages are stronger in the minds of tech companies and investors than they are in the data!

At the London Stock Exchange, we also look at how to innovate for companies once they’ve listed. The regulatory environment in the UK makes life a bit less onerous. For example, the UK has half yearly, instead of quarterly, reporting. But beyond that, the wider London Stock Exchange Group offers many services in post trade[.]

[Even] though this sort of thing doesn’t get the attention in the news blitzes about valuation and “reporting season,” it’s the sort of thing that makes a real difference to companies and their shareholders. I think that as tech returns its attention to the public markets, these sorts of offers from the exchanges will receive more attention.

And that’s that. It will be a fun task to tally up the year-end IPO score and see how things shake out.

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© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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