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Freshfields Transactions

| 4 minutes read

The UK IPO gap in numbers: a problem with the pipeline?

This article was originally published on 10 January 2024 on 'Thomson Reuters Regulatory Intelligence' by Thomson Reuters. © Thomson Reuters.

Tentative signs that inflation may have peaked have led many to ask if markets for initial public offerings (IPOs) will open up in 2024 — and, indeed, if London will open when everywhere else does.

The recent and sustained drop-off in public equity markets and IPOs has certainly not been limited to London. In 2022, worldwide IPO volumes fell 45%, with proceeds down by 61% year-on-year. Recovery has stalled: in the first nine months of 2023, volumes fell a further 5% and proceeded a further 32%[1].


All markets in the United States, EMEA and Asia-Pacific have suffered varying degrees of reduced activity, and those companies that have listed have subsequently met a storm of headwinds in terms of rising energy prices, supply chain pressures, inflation and higher interest rates, together with geopolitical crises.

While those headwinds have not been limited to the UK, the questions concerning the London market go back further. Lord Hill pointed out in his March 2021 UK Listing Review that London accounted for only 5% of IPOs worldwide between 2015 and 2020 and that the number of listed companies in the UK had fallen by about 40% since its peak in 2008.

'IPO gap'

There have been suggestions that the UK has been running at a listed company deficit (an "IPO gap"). It is unclear, meanwhile, whether question marks about the pipeline of UK IPO candidates are justified.

In fact, in a recent survey conducted by law firm Freshfields, together with an external research company, the numbers derived from a head-to-head comparison of the demographics of U.S. and European listing venues tell an interesting story.

Unsurprisingly, for a market that has long been home to leaders in the energy, natural resources, banking and financial sectors, the UK market is the "oldest"[2] of its peers on this side of the pond. Companies that are more than 100 years old make up 82% of the market cap of the 40 largest companies on the London Stock Exchange, with those under 50 years old making up just 5%. Those largest 40 companies in London are, on average, 151 years old, the highest average age of the major European exchanges, though not by much: Germany: 146; Italy: 139; the Netherlands 132; Austria: 131; France: 119.

By comparison, 66% of the value of the top 40 U.S. listed companies comes from those that are less than 50 years old.

London is in line with its European peers then and all have a significant IPO gap compared with the United States, driving their ageing demographics. Recent market turmoil cannot be blamed, but there are a multitude of factors behind that gap: a handful of mega-cap tech companies, significant cultural differences and market risk appetite, for example. These concerns have been part of the conversation in London for some time and are driving change in the reform agenda.

Quality of the pipeline to blame?

Some commentators have suggested that the quality of the pipeline in the UK (and Europe) may also be to blame. At inception, the UK is a hotbed of innovation. More unicorns (start-ups valued at $1 billion or more) are created here than in any other country outside the United States and China: the UK is home to unicorns worth $177.8 billion, equivalent to 5.6% of GDP. The United States is only slightly higher at 6.7%.

At the private investment stage, the UK lags behind the United States but — again adjusting for economic size — not by much. The UK attracts average venture capital investment equal to 0.74% of GDP annually. The U.S. figure is higher at 0.88%, but the UK is head and shoulders above the competition in Europe (France: 0.3%; Germany: 0.28%; the Netherlands: 0.27%; Austria: 0.13%; Italy: 0.05%)[3].

It is only with regard to the IPO data that London slips back into the pack. Since 2018, UK IPOs have generated proceeds equivalent to 0.26% of GDP on average per year, just over a third of the average adjusted venture capital investment in the same period. Germany and the Netherlands, meanwhile, had the same comparative level of IPO investment as in the private markets, at 0.28% and 0.27% respectively, both creeping ahead of the UK when companies are introduced to the public markets. (France, incidentally, falls off to 0.05%.)

While the UK punches above its weight and provides one of the best environments in the world for innovation and early investment, the eco-system needs attention to deliver those companies to the UK public equity markets. Rather than a shortage of high-quality IPO candidates in the UK, UK-born-and-bred (albeit often by overseas stakeholders) companies are seeking listing elsewhere. It is not the pipeline, it is the plumbing.

Reform proposals

Jeremy Hunt, the Chancellor of the Exchequer, in his 2023 autumn statement repeated the government's commitment to ensuring that UK companies have access to capital and to supporting the UK's capital markets. The Financial Conduct Authority's (FCA) final proposals for regulatory reform were published in December and are the product of extensive market engagement.

Enormous effort is going into these much-anticipated regulatory and policy reforms, and rightly so: the data suggests that the companies are there and that the potential for the UK market is huge.

*Unless otherwise noted, all figures are drawn from the Freshfields Corporate Demography Index 2023.

[1] EY Global Trends 2022 and 2023.

[2] Age measured by foundation of earliest identifiable legal predecessor, as of August 2023.

[3] Based on the period January 2018 to August 2023.