Wednesday 3 March 2021 3:46 pm

Spac-tacular: The City welcomes overhaul of stock market listings

The US phenomenon of Spac listings could soon make its way to the City after a government-backed report called for widespread reform in the stock market. 

Lord Jonathan Hill’s report into London’s listing requirements called for regulators to allow blank-cheque vehicles to list in the capital as well as to ease other listing restrictions. 

It has already been welcomed by the government and regulator alike and the Financial Conduct Authority (FCA) will soon start consulting on the proposals.  

In his Budget speech today Rishi Sunak welcomed the review saying it “more than delivered” on proposing “bold ideas” on how to increase London’s competitiveness. 

Similarly, the London Stock Exchange boss David Schwimmer said Hill’s proposals will ensure “public markets remain attractive for both high-growth innovative businesses as well as investors.” 

Share structure reform welcomed by tech firms

There has been concern that some of the country’s best firms are looking stateside due to their looser regulatory conditions.

“More than a third of privately funded UK fintechs expect to undertake an IPO in the next five years and are currently considering their options for listing. It is vital that we ensure that listing in London is an attractive option for these companies,” Catherine McGuinness, policy chair of the City of London Corporation said, welcoming Lord Hill’s recommendations.

Tim Ward, chief executive of the Quoted Companies Alliance, noted the shift in tone in the report in a bid to attract tech firms: “The current rules still reflect the types of companies that are in the FTSE 100 rather than the sort of tech companies that we’d like to see listing.” 

He told City A.M.: “I think it’s a real wake up call for the City. I think the City is now awake and willing to do something about it,” he added. 

Chief among Hill’s proposals is the introduction of dual class share structures in the stock exchange’s premium listing segment, which will give directors enhanced voting rights on some decisions. 

It is hoped introducing these share structures will encourage fintechs in particular to list in the UK, after the government-commissioned Kalifa review found it would be “particularly attractive” to founders. 

Manish Madhvani, co-founder and managing partner of tech investment firm GP Bullhound told City A.M. “We’re losing companies at the most crucial stage. We’re building these amazing companies, growing a lot of talent as well as jobs and then the best entrepreneurs are not able to list in London.” 

He adds the introduction of weighted voting rights will in particular attract high growth tech firms.

“They’re not normal companies, they tend to be more founder driven,” he added. “Founders aren’t going to be happy giving up total control so they need the dual class shares that gives them control over the strategic direction.” 

The review also set out plans to reduce free float requirements on the premium segment. City grandee Sir Martin Sorrell, executive chairman of S4 Capital, welcomed the “smart, pragmatic measures” noting “aligning ownership with control is in the interest of long-term value creation.” 

Spacs welcomed in post-Brexit landscape 

Lord Hill’s review looks to capitalise on the latest global equities trend of Spacs. Also known as blank cheque vehicles, Spacs raise capital through a public listing with the purpose of acquiring an existing company. They’re considered an alternative to an IPO and offer private companies a faster and more predictable way to go public. 

They have enjoyed popularity in the US – nearly 180 Spacs have been filed in New York alone – but current regulation makes London less competitive in this area. 

The review calls for the rules surrounding Spacs, where vehicles may have to suspend trading when a deal is announced, to be liberalised. 

Charlotte Crosswell, chief executive of industry body Innovate Finance, welcomed the review which could level the playing between London and other European markets. 

“We are pleased to see the review addressing the competitive market for Spacs which are increasingly targeting European tech and fintech companies. The world has become even more interconnected, which risks a race to attract our most exciting companies to overseas markets.” 

Amsterdam is quickly emerging as the continent’s centre for Spacs as investors look to capitalise on the increased interest in the vehicles. LVMH founder Bernard Arnault recently launched his own Spac targeting financial services companies. 

But these blank cheque vehicles are not without critics. Russ Mould, investment director at AJ Bell warned the review may be a result of a “fear of missing out”. 

It “is just about the worst possible reason for making any investment decision… To let this emotion drive a change in the rules with regards to Spacs in particular would potentially expose investors to greater danger and the risk of portfolio losses.” 

Madhvani agrees there is a risk the Spac market could become overheated but that London has a “real shot to change the rules.” 

“I think London would be good because it is more naturally conservative than some of the other exchanges. It means Spacs that do succeed, raise money and are backed by the institutions would be high quality and really understand tech.”