CashNews.co
The UK’s capital markets are undergoing their biggest revamp in decades as government ministers and executives seek to restore the competitiveness of the City of London and reverse the outflow of investment to other international financial centres.
These efforts, which began under the previous Conservative government and have been backed by the new Labour administration, include an overhaul of stock market listing rules and a drive to encourage UK pension funds to invest £50bn in high-growth private companies by the end of the decade.
The aim is to tap into the vast pools of the country’s pension capital, both to support (and retain) British start-ups, which might otherwise list abroad, and to attract international businesses to the City.
Politicians have made the headlines by driving the ambitious agenda. But corporate lawyers have wielded significant influence behind the scenes, leading parts of the work on rule changes and advising on the implications.
And, while UK corporate law firms stand to earn lucrative fees if the drive to revitalise London’s moribund initial public offering market is successful, their goal is broader, according to people involved.
“It is motivated by it being important for our economy,” says Mark Austin, a partner at Latham & Watkins who has been heavily involved in designing the changes. “But it is also about wanting to make sure that our generation hands over . . . a financial services sector to the next generation that is as good as, if not better, than the one that we currently have.”
Austin authored a government-commissioned review in 2021-22 on how to improve capital-raising processes for companies that are already listed. He has also been central to efforts in the City to push for greater acceptance of higher executive pay and changes to governance requirements for London-listed companies, which he and many others believe have become a competitive disadvantage against other countries.
He says the reforms are aimed at removing “friction points” that had built up in the UK market over the past two decades. “We always knew what they were, but they were hard [to solve]and we didn’t have to address them while we were the default listing venue and financial centre outside the US,” he says.
When the Brexit referendum, in 2016, undermined the City’s standing, the UK’s financial services sector had “to look at ourselves with a bold and critical eye”, Austin explains.
Concern over the health of the London stock market has been fuelled by FTSE 100 groups quitting the blue-chip index in favour of primary listings overseas, including miner BHP, betting group Flutter, and building materials group CRH.
New York, in particular, is seen as offering more liquidity and better valuations, but there is also competition from other European financial centres. Private equity giant CVC, for example, chose Amsterdam for its roughly €15bn flotation this year.
The drive to update the City’s rules has involved company bosses, ministers, regulators and executives from the asset management, pensions, venture capital and banking sectors.
Lawyers who have worked alongside them say their profession has brought other important skills to the table. These include “helping to articulate the problems that need addressing” and “ensuring the right information is made available so the decision-making process stands up to scrutiny”, according to James Roe, co-leader of A&O Shearman’s UK equity capital markets practice.
Roe has fed into several aspects of the UK’s recent rule changes, including through his work on the capital markets committee of TheCityUK, a financial and professional services industry group.
Lawyers’ training means they have relevant skills in analysis, negotiation and writing as well as wide professional networks that help them to convene experts from across different sectors, points out Rachel Kent, a consultant and former partner at Hogan Lovells.
Kent led a government-commissioned report last year on how to boost the quality and quantity of investment bank and stockbroker research on UK companies.
Their research notes help investors to understand companies and decide whether to back them. However, producing these reports has, in many cases, become economically unviable following a change in rules on how providers could charge for their analysis. That change, now being reversed in the UK after Kent’s review, had been blamed for making public listings less attractive to smaller companies.
Not enough lawyers get involved in this type of public policy work, says Kent. “The lawyers are in their office drafting the contracts and the funding agreements . . . We need them doing that but we also would benefit greatly, I believe, from their broader input into policymaking issues.”
Sizeable listings have remained elusive, but there are hopes for a recovery in IPO activity both in the UK and globally. Chinese fast fashion group Shein and Ebury, a payments business owned by Spanish bank Santander, are among the companies considering floating in London.
Roe expects an improvement in the conditions of public markets over the coming year. But he cautions that there is a need to distinguish between a thawing of the IPO market, which has always been cyclical, and any positive effects of the UK’s rule changes.
The root causes of some of the challenges facing the UK’s public markets date back two or three decades, meaning the success of the changes should be judged only in the longer term, he says.
“It’s therefore not unreasonable to think that it would take 10 or more years for the positive impact of the structural changes to come properly through,” Roe notes.