More UK companies are drawing up plans to shift their stock market listings to the US, bankers say, in a growing exodus that threatens to undermine London’s effort to reinvent itself as a vibrant hub for global equities.
CRH, the world’s biggest building materials company, on Thursday became the latest business to seek an exit from London, following in the footsteps of gambling group Flutter whose shareholders are due to vote on a secondary US listing in April.
Boards of other companies are discussing similar moves, drawn by a larger, deeper market, higher valuations and the prospect of a government willing to spend hundreds of billions of dollars on infrastructure, according to senior investment bankers.
The string of departures and prospective moves from London underline the UK’s difficulty in attracting and retaining companies, despite the British government’s attempts to reinvigorate the City and lure businesses away from rival exchanges. Executives see the US as an environment that embraces higher growth, while they bemoan the lack of interest from UK-based investors in their home market, particularly pension funds that have increasingly shunned British stocks over the past two decades.
“There are no domestic equity investors here — everything else is a symptom,” said Michael Tory, founder of advisory firm Ondra Partners. “It’s not about the listing rules, the governance or the free float requirements. Global investors look to domestic investors for the signal to validate the investment, and that local signal has simply flickered out.”
London was dealt a further blow after SoftBank this week rejected a listing in the UK for Cambridge-based chip designer Arm despite lobbying efforts by the government, regulators and exchange executives. Oil major Shell had also considered switching from London to a New York listing, while plumbing group Ferguson and biotech Abcam are among those that dropped their UK listings last year in favour of the US.
LSE group chief executive David Schwimmer shrugged off the recent departures, saying: “We are the most international financial centre in the world by far and we continue to attract both capital and companies that have that kind of international perspective.”
But Schwimmer also pointed to diminishing investment from British pension funds in domestic stocks — something that has dogged London’s capital markets for years.
“The amount that has been allocated to UK equities has dropped dramatically over the last 20 years in favour of fixed income and that raises some really interesting questions.”
Holdings of UK-listed companies by British pension and insurance funds have plunged from about half of their portfolios to 4 per cent over the past two decades, according to data from Ondra.
This shift in asset allocation was partly driven by a big accounting change in 2000, which forced companies to recognise pension fund deficits on their own balance sheets.
Defined-benefit pension schemes — which promise to pay employees’ pensions at a fixed level, sometimes based on their final salary — piled into long-term bonds in order to offset big swings in their liabilities, in liability-driven investing strategies that largely eschewed equities. UK pension fund holdings of fixed income surged from 17 per cent in 2000 to 72 per cent in 2022, the Ondra data shows.
Richard Marwood, head of UK equities at Royal London Asset Management, said pension reform and incentives for investment in domestic equities should be a primary focus for the UK. He added that the London market suffers from a “drip, drip, drip” of selling that contributes to the valuation gap with the US, and investors would rather avoid this “leaky bucket” in favour of the “overflowing” New York alternative.
LDI strategies blew up in the aftermath of the UK’s “mini” Budget last autumn. In a review last month, the House of Lords Industry and Regulators Committee acknowledged the accounting requirement as one of the root causes of their adoption and said that the change failed to recognise for pension funds “the potential upside from investing in a broad portfolio of assets including equities”.
“The US markets present a stronger investor pool, a stronger comparative group and will give a better valuation,” said Simon Olsen, an equity capital markets partner at Deloitte. He added that several companies were preparing UK public offerings after failing to float in the US through special purpose acquisitions or ordinary listings over the past two years. “Those businesses, having realised they’re not going to get what they expected in the US, are now coming back to London.”
UK investors are considered more risk-averse and comfortable with the traditional sectors that dominate London’s indices, such as mining and energy, subsequently hampering the UK’s ability to retain newer companies in sectors such as technology and help them grow. They also tend to be overly dependent on dividends for returns, leading to under-investment.
“Domestic UK investors have not evolved with the times,” said one senior banker, adding that “once upon a time London was the centre for mining companies globally, but it lost an opportunity to evolve when the mining sector came down and tech came up”.
Company boards are also increasingly frustrated with the scrutiny of executive pay and what they see as the “box ticking” exercise over corporate governance in London. Large management payouts at CRH have been criticised by high-pay campaigners while some investors voted against them.
US exchanges have actively courted UK companies amid dissatisfaction with the domestic market. Cassandra Seier, head of international capital markets at the New York Stock Exchange, said the exchange undertook a lot of outreach, speaking to bankers and companies and that “in particular in London, a lot of focus is on bringing companies to the US”.
London’s attractiveness to companies and investors is a central part of recent attempts by the government to reinvigorate the City of London, through the “Edinburgh reforms” that aim to rip up EU rules to make it competitive against rival financial centres. To boost London’s equity markets, the government will revamp company prospectuses, reconsider short selling rules and review investment research.
The proposals are the most significant shift for Britain’s financial services in a generation but bankers said they may not be enough given the attractions of other exchanges, including the threat of Switzerland and Amsterdam.
Meanwhile, CRH’s departure is a stark reminder that London is already falling behind in the race to retain its most prized companies.
“If anyone was in any doubt that we are in the shit, they should be waking up now at least,” said one government adviser.