Understanding public markets in flux with BCLP - Listings fade as bids multiply | Commercial Awareness Compass #39

Hello everyone and welcome to the commercial awareness compass. You're weekly guide to developing commercial insight that goes beyond just the headlines. Each week we take one major story and break it down to help you progress through three levels. Beginner, intermediate and advanced commercial awareness. Whether you're just starting out or already have some understanding, this programme is here to help you think like a commercial lawyer. By the end of today's session, you'll have practical insights that you can use in applications and interviews. So today's episode explores a trend that's reshaping how business raises capital and how laws help them do it. We see in fewer companies listing publicly through IPOs and more companies being taken private. This shift reflects changing market dynamics with everything from interest rates to invest the sentiment and raises some important questions around the future of London's role as a global financial centre. So my name is Daniel Shefford and the Law Conversion Student and a future trainee solicitor. And today I've got the pleasure of being joined by Tom. Welcome to the podcast Tom. Would you like to introduce yourself and tell people a bit about your work? Yeah, hi Daniel. Thanks for having me on. My name is Tom Bacon. I'm a partner at BCLP in our M&A corporate finance team. I'm a specialist in public company situations. I'm a company that is IPOs, takeovers, continue obligations, advisory for public companies and private M&A situations involving public companies. So cover the full gambit of corporate finance activities that public companies and large institutions would encounter. Very nice. It's a big area with a lot to cover but I'm sure we'll get through it. So actually before we begin, as you've mentioned, IPOs, those aren't familiar with it. What is an IPO? An IPO is an initial public offering, essentially, an offering to largely institutional but sometimes also retail investors of shares in a company and access to being sort of listing on a public exchange, such as the London Stock Exchange. So now that we've got that, so we've kind of discussed IPOs. But IPOs are reportedly at their lowest level in London for more than 30 years. Why if IPOs volume drops so sharply in London? But I think there's a global phenomenon in terms of a flight from public equity. I think there's a general perception with the growth of private equity that companies are potentially staying private for longer. I think you are seeing the hangover perhaps from the ultra low interest rate environment that existed prior to and during COVID where London and other markets had record years around 2021 in terms of IPO volumes. And potentially there's a number of companies where potentially the valuations that they get through the public markets are not where they think they would want them to be particularly as well they enter those companies in the investment cycle. So remember what we're talking about here with an IPO, we're talking about an exit. We're talking about potentially an investor either seeking a valuation and raising more capital or potentially selling some of their shares into the market and therefore taking the valuation of those shares. And if you're taking perhaps private money or had your company valued or acquired that company maybe five or six years ago for a higher valuation you may not necessarily want to accept the market valuation that you're going to get through the IPO market. There's a lot of there's a certain amount of it is driven global phenomenon is driven by people sitting on their hands. Now why do we have why are we seeing this so frankly in London? I'm not sure if it's purely a London thing if you if you talk to people in the US and you talk to people in in capital markets in Europe I think that they they would say that similar phenomena are ongoing the reasons I've already said I think from a London perspective. We are perhaps more cute acutely affected by the implications of the B word. I think you know the implications of Brexit as it has meant that there is a smaller pool of capital of which you can access within the UK. I think that there is a potentially a reluctance there's something I probably will talk about and it's something that you know today the day we're recording this is the day that Rachel Reeves is going to make a mansion house speech. There's a lot of discussion around retail inclusion and I think you know one of the big differences between the US and the UK is that the sort of reluctance of individuals to invest in equity over potentially just putting their money in cash savings. And I think that there is a sort of there is a real need within the UK and a real drive towards trying to convince people to take more risk in their savings and why in the language they invest. So you know I think it's a global phenomenon but I think equally there are some unique issues within the UK that potentially it meant this has been a more acute acutely affected by the city. Are these drops usually quite cyclical or does this specific drop kind of reflect kind of a more deeper or structural issues within kind of the environment of this. The IPA market is a cyclical market you cannot get away from it you know you all go through you will go through periods of beam and bust there are you know there were periods in my career where again we know not to the extent of where we are now. And so you know you know you know you know what people talk about in the 20s 21s where there is a hundred IPOs you'll suddenly turn around one day and the market decides to everyone decides that now's the time to enter the market and people talk about the IPO window. And so there is a sort of people that best ways are fear of missing out and everyone wants to know the investor starts to think well you know I don't want to miss the next great company that's going to come to the market which is the good investment opportunity. That's the sort of the positive spin is this is just a cyclical downturn there is a potentially a sort of wider structural view that some people would take that actually this is just the movement of where the market is going which is smaller growth companies will not necessarily look to to. So they don't want to list on the market because they don't want the additional red tape and regulatory oversight and reporting requirements and therefore say private longer and actually that would just mean that there are there are fewer but potentially larger companies on the market and whether that then has an implication on you know whether we will see a. The movement more towards the US where they are much more focused on larger corporates the US market I think you know it's worth noting that a lot of people are probably aware from the from the media that there are companies that are looking to move from London to the US now that is actually a it's actually a relatively small subset of companies I think the bigger issue for the London market is actually the number of take over. So I think the question mark is the London is are we seeing a scenario where the smaller growth companies that were traditionally on a more in the 30 to 50 are being sort of you know are now likely to just remain as private companies owned by private equity or through accessing sort of institutional capital through those through. Through you know through the private markets or or are they the larger companies then moving to the US market where they're more more receptive to larger corporates and they can get better valuations for those corporate so that would be the systemic argument now I firmly hope and I do believe that the UK market has a strong strong place to play and I think that we'll talk to you know throughout this podcast about what some of the real benefits are of. Being listed particularly for for growth companies. I guess that's kind of one of the interesting things about this topic is that not only is your role as an advisor is to kind of look at the domestic and how they should operate but also your concerns go a bit further than that is in you've got other markets to kind of keep an eye on and try and maybe swear your advisor company in a way to kind of. And on how they should operate or look at operating other markets I guess that we're a we're a one firm international law firm so we're going to advise our clients on where the best places to list for them but equally as a as an Englishman I do like I would like to see and I think it's very important for the British economy that the strength of the city and the city is built around. That you know a very strong liquid in London stock exchange you know it's been a key trading hard by think since the since the 18th century so it was. it would be a real shame to see that decline. And I think we should be, you know, the government should be focused on, and you know, we as supervisors should be focused on continuing to support it. - Yeah, definitely. There's also been a lot of debate about something called dual class share structures. For those that are unfamiliar, what are they and why are they somewhat controversial? - I mean, ultimately a dual class share structure is a share structure, is a share structure where founders within the business are given certain additional rights in relation to their shares. Now, the reason why they're controversial is historically the listing rules have built on the principle that, you know, every shareholder is entitled every sort of equity shareholder is entitled to the same rights in respect to each class. Now, the reason why one of the reasons that was given by tech companies without five or six years ago as to why they prefer the US listing to a UK listing was because that the founders of those tech companies could pursue these kind of dual class share structures. And what these dual class share structures allow them to do is to essentially protect the company for a period of time from potential takeovers. So what you'll traditionally see is that, the potential, you know, you might be a golden share or it's some sort of additional class of shares that says that in certain scenarios, the the holder of that share basically gets an outsized number of voting rights, which allows them to sort of swamp the rights of a potential, potential hostile bidder. Because if you're, you know, if you're the founder of Wise and you've built this business and you've decided to take it public, but you're not quite ready to exit it, you don't wanna put yourself, you know, the big risk of the public market is you can't restrict who's buying shares in your company. And so, and so what these, what these dual class share structures are seen to do is to ensure that, you know, the voting rights within the business on key issues retain, are retained within that founder. Now, they're seen as contentious because they go against the principle of, you know, that each every shareholder is treated, you know, it's one share, one vote, you know, everyone ranks paripassue in terms of their rights to dividends, et cetera. But I think they're seen as controversial because essentially it allows us sort of, the founders to retain a veto position over the company, which potentially institutions are not particularly keyed on when they're, you know, they can have quite large positions, quite large equity holdings within these companies. - I think we'll move to the intermediate section now. We'll kind of look at the flip side of, of IPOs. So as we've mentioned before, kind of, with IPOs somewhat slowing, there's also been kind of a rise in takeovers, especially in take private deals. What is driving this and how do the legal structures differ? - Yeah, I think it's, I think as well, let's start with, let's breaking some of this down. So a takeover is generally what people refer to when they're talking about the acquisition of all of the shares in a public listed company. And when we're talking about and take private, generally and take private, it means the acquisition of a, of a listed company by a private equity house, so you're taking that company private. There are also companies that are not, you know, there are, there are, you know, transactions as takeovers that are done which are not take private, where you essentially, you know, be one large PLC taking over another one. And that can often be a mix of cash and shares. You may, you may issue further shares onto the current listed company, you know, return for your shares and the other listed company. But there's also, there isn't big focus on take private. Now I don't think actually the data suggests that, the, the incidents of take private is, it isn't greater than actually that takeover offers by large institutions. The reason why, the reason why I think there's a lot of focus on takeovers is, is frankly, valuations. Now, I'm not a broker. And I, you know, I can't tell you whether these, the UK companies are undervalued with any sort of certainty, that's not my job. What you hear is comparative to other markets that the valuations are either multiples of which the UK companies trade to their future sort of, their future earnings is lower than in other markets. And that has driven both strategic buyers so other corporate and private equity houses to look quite closely at UK companies listed in London. Now, whether you think these things achieve, the reason why they look cheap is because they're daily market market. So if you, if the housing market collapsed tomorrow, you may not, if you, unless you have to, because you don't, you can't afford your mortgage. Your, your, the, the, the instant reaction is, well, I'll just sit on my ass. Because you, you don't need a daily price. There's no daily price on your house. So if you own a company privately, you're not marked a market. You, you just, you think that the company is probably the valuations gone down, because interest rates have gone up. So therefore, you know, the cost of potential profits in the business has essentially gone down because you've got to service the debt or whatever it is. You and then that multiple that you're going to receive for that company because someone's going to cost someone more to buy it is, it's going to decline. But what you would do is you just wouldn't sell it. Well, you can't, you don't have that luxury in a, in a public market, public market on a daily basis. There's a, there's a, there's a bit of us bread and then there's a, there's a, there's a price that goes on the screen as to what that, what that stock is trading at. So it's easier for people, for buyers on a public market, in this environment, where valuations are challenged to actually go and do a takeover than it is to try and approach a private exit house to take an already private company, takeover an already private company. Because you, they'll just say, well, I'm not willing to sell because I, I bought it for X. So I don't want to take a 20% discount on what I bought it for. So that in a sort of nutshell, I think is why, in my view, you're seeing this growth of take private because people think they look cheap, whether that's just a reflection of where the market is. I don't know. I guess kind of a big part of your role as well is kind of advising clients on kind of the big due diligence like process. From a due diligence perspective, how does a takeover compare to an IPO? I mean, I think you've got to, these are two totally different processes. So on an IPO, this is your first, your first foray into the public market. So if you're a sponsor or a nomad, nomad, sponsor being the person that engages with the FCA in relation to a company that's looking to list on the main market, the FCA's official list, London, Stocks in Main Market, or nomad, the person who is basically your sort of nominated advisor to help you to, to list on the London Stock Exchange's aim market. In both scenarios, you're going to want the law firm to run the due diligence exercise to understand what are the issues in that company? Where are, where's the potential areas where an investor that you're going to be bringing to this company is potentially going to lose their money? So that could be a litigation claim. That could be a potential, you know, you might be saying that the whole business model is built on one contract. And that one contract with this key, with this key customer, you've got to be sure that that contract is in good standing and there's no issues in relation to it, you know, they're not going to be able to terminate it in the next three or four months. You know, you've got to be able to understand the diligence is there to ensure that the business is going to be able to continue as it is. And when you're selling that business to investors, then everything in that investment case is supported. So that's the IPO. The IPO is, can I, do have I got the information to know that this business that's never been on the public markets before? It can be sold to investors and those investors know that what they're buying is ultimately a good investment. And there's not going to be any issues in, you know, three, six, 12 months time. Takeover, very different. Takeover, you will on, you know, takeover is one company buying a listed company. It's worth saying that from a diligence perspective, you have to be cognizant of the takeover code. Now in the UK, we have a very unique takeover regime. A regime that actually, you know, we do here at BCCB, do a lot of international work. And we're constantly working with overseas bidders about, you know, looking at companies for takeovers. And they will always, you know, they're used to transacting in their local jurisdictions. But they will always think that the UK takeover code is quite unusual. Now this-- code basically sets out the rules of the game. The rules that can apply to basically protect targets from bidders to ensure that the bid process is run in a sort of wargly way. Now one of the fundamental tenets of this business, of that bid process is any information that you give to one bidder, you have to give to another. So that will obviously color what diligence you can do on a public target because public targets will not necessarily want to give all their extraordinary amount of information to one bidder that they then potentially have to give to another one they can't control you that other bidder may be. So if the bidder could come along and say, "Well, I want all your information that you gave to this bidder because we're also interested in making a bid." And that bidder could be a competitor, so you might not necessarily want to do that. So, largely when you're doing a diligence exercise on a takeover, you'll have huge amounts of public information because the whole idea of being publicly listed is there is public accounts in quite a long, an hour at any public investor who can go and buy shares on the market to be able to understand the business. So you'll have public accounts, you'll have regulatory filings, so the market piece regulation requires that any international information which is material non-public information, probably a price sensitive, public information to be made public. So therefore you have all the information that's potentially price sensitive, has an impact on the price of the shares to be made public, you'll have the accounts, you'll also have any kind of other public information that that company has decided to disclose. And generally you will start from that position, this is the information that's been publicly disclosed. Now what other information do I need to be able to support my investment case in this company? It's a very different approach to what you do on an IPO, which is an IPO. Tell me everything about your business because I need to know what's going on in case there's any potential issues or skeletons in the cupboard. I guess that's quite an interesting way of looking at it, obviously with the takeover you need to understand that there's a strategic position that the seller is in in order to either not necessarily withhold information, but which be very selective about which information that gives out certain sellers. So that's really interesting. I think we'll have a, now we move to the advanced section. We'll kind of look at what reforms are potentially going to come in and kind of the direction things are going with and how you advise a client on that sort of areas. So the UK is currently exploring changes to revive the IPO market, so things like allowing more dual class shares and tax incentives and stuff. But how might those affect company decisions? Right, so if we take a step back, probably about two or three years ago, there was a sort of, I think a bit of soul searching in the London market. And we, I think everyone realised that London had become all of a sudden capital markets was an internationally competitive game. New York was trying to steal that work with business from London, Amsterdam, post-Brexit, Amsterdam, Paris, Madrid, Milan. They're all out there trying to convince companies in their own jurisdictions, but also companies other jurisdictions to come and listen to their exchanges. What I think London realised was that our listing rules were sort of, we'd always held ourselves out as, we're not going to be the minimum requirements that you have to be an EU-regulated market, which was always our position for pre-Brexit, was we would have a super-privileged regime where we'd have the sort of the minimum we'd had for regulating market plus some additional bells and whistles to give additional best of protection, which was a goal-plating. And I think what London realised was we'd made ourselves uncompetitive both because we're now no longer part of European Union, so we don't have that access to that, the wider pool of capital that I think we got from the European Union, from being part of the European Union. But also because our market and our rules were particularly work-alplated and we had these additional bells and whistles to give us. So the new rules I think came out about two years ago now, those new rules, maybe one or two years ago, those new rules include liberalisation around class one transactions, was probably one of the key ones, and some liberalisation around trap records and the requirements that you'd have to be to list on the main market of the London Stock Exchange. The reason for that was to encourage both early-stage businesses, but also growth businesses to list in London. There are further, it's worth noting that today, as I said earlier, today is the day of Rachel Reeves' Mansion House speech, and I'm sure this will be coming out after that speech, and it may well be the one I've said is not. I think we've already had a pre-four on or off that speech, so I think we know what's going to be said. They are the FCA of today who released their 400-page paper on the changes to the prospectus ratio. And up till now, you are limited in terms of the size of any offering without a prospectus to 20% of your issue share capital, and they're actually now increased that to 75%. With which basically allows companies to raise significant amounts of money on the public market without a prospectus. And this is the fundamental benefit that being listed in my view. When we talk about listing, there are a few key reasons why you would do it. I think one of the things you will probably ask me is what we can do to be better as advisors to support the market, and it is to really extoll the virtues of why being a listed company is beneficial for your company. There are the reputational benefits of being a listed company. People do sort of regard you in a more institutional fashion if you're a PLC, but one of the big reasons why it's so important is. If you want to go and raise capital as a private company, that will take you months. If you want to raise capital on a public market, depending on where the pricing is, you can raise capital in a very, very, very quickly. You can do it over the course of a few days. And you do it on the back as a standard form documentation without significant negotiation. Now these changes to the prospectus rules will mean that companies can raise quite considerable sums of money. So up to 75% of their current market gap, they'll be able to raise quite significant sums of money without necessary having prospectus, which saves them. I'm a lawyer, I quite like drafts, I don't really like drafts, but it pays off fees to draft the prospectus is. But what I would rather see is more companies coming to listing and actually being a PLC and having access to that capital market. The more good companies we have on our market, the more the money will flow into the market as people will want to invest in those companies, which becomes a sort of virtue of circle. And so I think that we want to show people that there are benefits through that access to capital and the ability to raise capital in an incredibly low cost and efficient way, which is kind of the benefit of what we're talking about with the prospectus rule changes. That really nicely leads me into my final question. So we kind of just talked about kind of rebuilding confidence in the UK's capital markets. What role can more firms play in that effort? I think that what London has, which again we're doing necessarily, I think from a post great financial crisis world where there's a general negativity around the city from people that are not within it. There's an almost shame around this advisory community that exists to support UK's business. I think we have to be more positive and we have to be more supportive of that community. I think that London has probably one of the best ecosystems for supporting companies, for supporting large businesses looking to join a public market. I think that lawyers have a role to play in advising their clients on the best ways to access capital and to continue to grow their company. I think that we as a community have an obligation to continue to support and install the virtues of both the city and what the city does for the wider economy. economy. The city is a market place at the end of the day. It's about matching. It's always been a mercantile centre for hundreds of years, for thousands of years. And it's all about matching buyers with sellers. And that's all essentially the stock exchange years is finding buyers and sellers for shares or investors in companies which is about access to capital. With your A, you might be a biscuit manufacturer and you need to main in another piece of equipment to be able to make more biscuits that will increase your profit. I mean, you can hire more people. Where do you go and get the money to buy that additional piece of equipment? Well, you can raise your money on a capital market, either an equity market or going to get some debt or something. So all of that relies on a strong capital market. And I think that there is a, you know, we have not been good enough at sort of talking to the wider community about the benefits of that capital market and why it's so important that we continue to support them. I guess I'm sorry. And why for London and for London's purpose within the global economy, it is incredibly important. I guess that's kind of why it's this topic is specifically so important. It's almost kind of a bit of a, when you look at it like that, it's a bit of a funnel for a lot of the other areas of kind of commercial law. So if you can get this stage right and get people investing and getting involved in the London Stock Exchange, it affects areas such as construction or real estate or so many different areas where if you're able to get a strong position here, it helps not only your firm to get business across other sectors, but generally there's just a lot more prosperity around it. Yeah, I mean ultimately London is a financial services hub and what drives financial services is its capital markets. So and without that capital markets, then, you know, London as a sort of market health centre starts to become less, less relevant and ultimately, you know, that has an implication for the UK and for London and for, you know, future careers. So I think it is so important and I think that's why we need to support the efforts of the government to encourage more investment in UK companies through better access to, you know, to stop some shares. It's worth stating here, you know, for all of you, there's been a lot of talk around cashisers and what we should do with cashisers and whether we should limit the allowances for cashisers. And I think that I think that there's been some, again, there's some pretty poor media coverage of the story in a sense of building society saying that this will impact mortgage costs, but it's kind of not about that. It's actually about the proof is in the fact that cash will not be inflation over the course of a long period of time. So actually, if you want to retain the value of your money, you are far better to invest in stocks and shares, which have a far more likely to have a return that beats inflation over a sort of 20 to 30th window, which is the time period you should be holding shares. And it's that saving and it's that investment that's going to continue to support this market. Yeah, and I was it for those kind of the one in to follow along with this story. As you mentioned, Rachel Reeves is coming out with her paper today. So we'll see how accurately we've got everything today. Fingers crossed that it's not just going to be a complete 180 and that this episode is going to get scrapped, but it should be, it should be absolutely fine. So thank you so much, Tom, for joining us today. You've been an absolute pleasure. And thank you for everyone listening to today's commercial awareness compass. Remember, being commercially aware isn't just about following the news. It's about understanding how these developments shape business decisions and legal strategies, whether you're just starting out or already have some thinking like, sorry, already have some experience thinking like commercial advisor, always ask, how does this impact clients on what can a law firm do to help join us next week to keep building your commercial awareness. And until then, prepare without the panic. Thank you.