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The boss of one of the City’s biggest independent investment banks has sounded the alarm over the future of London’s capital markets, saying they will end up “dead” on current trends.
Peel Hunt chief executive Steven Fine told the FT that there was no sign of a revival in London’s moribund market for initial public offerings.
“Our industry has been dramatically hollowed out over the last five, 10 years,” he said. “If we carry along this trajectory we will end up just like the Irish market, which is dead.”
London IPOs raised just £0.3bn in the first quarter, a contrast to mainland Europe where big flotations included the SFr2.3bn listing of dermatology group Galderma and retailer Douglas raising about €850mn.
The trend was driven by acquisitions of UK-listed companies, a lack of potential new issuers and outflows from funds that invest in UK equities, he said.
“The relentless M&A and the de-equitisation, the lack of refilling the hopper is starting to bite quite hard,” he said. “I’m not convinced the IPO market is going to open soon.”
Fine’s comment came after Peel Hunt published an end of year trading update on Wednesday that said it expected revenues for the year to March to rise 4 per cent year-on-year to £86mn, driven by takeover activity as UK IPOs remained “muted”. That compares with revenues of almost £200mn in the year to March 2021.
Peel Hunt also published research that indicated the FTSE SmallCap Index could cease to exist by 2028 because of takeovers. Funds that invest in UK companies have had 34 straight months of outflows, which has lowered valuations and made companies’ managers question the rationale for being listed, depleting the UK’s stock of mid-cap quoted companies, the research found.
“The pools of capital in the UK are quite severely constrained by outflows which don’t show any signs of coming back,” Fine said. “That just leaves capital markets at an impasse.”
Takeovers of UK-listed companies have picked up pace at the start of the year, with bidding wars for the likes of packaging group DS Smith, telecoms testing company Spirent and logistics group Wincanton.
Several big UK-listed groups are also moving their primary listings to New York, such as the gambling group Flutter and building materials group CRH.
Along with a lack of investor demand for UK stocks, Peel Hunt’s Fine also said that would-be IPO issuers were being held back by “valuations [that] are not matching up to reality”.
Meanwhile private equity groups faced “constipation” with pressure to both make investments and sell out of assets, he said, given the industry sits on a record number of unsold companies.
However, the chair of rival UK broker Cavendish, Lisa Gordon, was more optimistic. She expects the market to pick up in the coming months with central banks poised to reduce interest rates. Lower borrowing costs had “to feed directly into the attractiveness of equities. Logically people would say the market faces better times”, she said.
The slowdown in the UK equity sector has led to consolidation among smaller brokers in the sector. Cavendish itself is the product of a tie-up between Cenkos and FinnCap last year.
Fine said that Peel Hunt was the best positioned among its rivals to operate independently, and has 150 corporate clients including 43 in the FTSE 350.
