In 2023, the global IPO market experienced a relatively quiet year. However, recent research conducted by Ledgy, an equity management platform, has revealed a surprising trend among UK tech companies regarding their Initial Public Offering (IPO) preferences.
Despite facing challenging conditions in the London Stock Exchange (LSE), a significant majority of these companies are showing a preference for listing in the UK.
In fact, PwC UK’s Global IPO Watch report for 2024 also shows a cautiously optimistic outlook for IPOs in the coming year. The report predicts a general increase in economic confidence and a backlog of demand for exits, meaning it could be an exciting year for Western IPO markets.
London Stock Exchange’s Challenging Year
The LSE has experienced a difficult period over the last year, recording the lowest number of new IPOs since the financial crisis of 2008-09.
This caused UK-listed companies such as CRH and Marex to list shares in the US instead. This trend has raised concerns about the future of the LSE and the UK’s attractiveness as an IPO destination, which could harm its reputation as an important global economy.
British Tech Firms Stand Strong
Contrary to the challenges faced by the LSE, Ledgy’s “State of Equity and Ownership 2024” report, which surveyed 2,500 companies across 10 markets, shows resilience among British tech firms.
Approximately 72% of these companies still prefer to list in the UK, suggesting a potential revival of the UK IPO market in the coming years. However, the uncertain economic climate has led 21% of these companies to deprioritise their IPO plans.
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Trends In Fundraising And Valuation
The report also sheds light on fundraising trends among larger tech firms.
Only 48% of companies with over 1,000 employees raised money in the past year, compared to about 70% of smaller companies (250-999 employees). This could be caused by larger firms having higher cash reserves and better access to banking facilities, allowing them to avoid equity fundraising, which can lead to dilution of shares and may require revealing a reduction in valuation.
“Down Rounds” In Europe And The US
An interesting statistic from the report is the increase in ‘down rounds’—fundraising rounds where companies receive a lower valuation than in previous rounds.
In Europe, the report shows that 22% of funding rounds resulted in down rounds, a figure that is more than double that of the US (9%). This potentially shows the differing investment climates and economic conditions between the two regions.
Educational Gap In Financial Literacy
The report also highlights a concerning gap in financial literacy within UK companies. While a high percentage (82%) of C-suite executives are well-informed about their company’s latest valuation, only a minority (29%) of junior, non-managerial employees have the same level of understanding. This suggests a need for better financial education and communication within these firms.
Yoko Spirig, Co-Founder & CEO at Ledgy, commented: “Although it’s a tough time for companies thinking about going public anywhere, London listings have suffered more than most in the last year. So London Stock Exchange bosses should be relieved that for most UK companies, London is still the preferred destination for a stock market listing.
“That said, our finding that the macroeconomic environment was the biggest factor putting companies off an IPO suggests that we need further softening of inflation and interest rates through 2024 for the tide to start turning.
“Inflation, interest rates, and investor sentiment have all played a part as many companies have experienced valuation cuts in the last 12 months. But it’s interesting to observe that the ‘down round’ phenomenon was twice as prevalent in Europe compared to the US.
“Meanwhile, our data finds that larger companies (>1,000 people) held back from fundraising to a greater extent than their smaller peers, suggesting that the pivot away from ‘growth at all costs’ is real.
“Private companies need to know that stock exchanges will have the liquidity and appetite to support ambitious, innovative companies entering the public markets. But if IPOs are not a realistic option, companies also need to be confident that the growth capital to support continued scale will be there. Otherwise, it will be harder for London to sustain its place as one of the world’s preeminent tech hubs.”
Read the full report at: https://ledgy.com/reports/