Why London listing is no longer the gold standard for many companies: Martin Towers

Those with a strong market position and the ability to pass on cost increases to preserve operating margins will be the winners and gain market share. Likewise those companies with strong balance sheets will be at a considerable advantage, shielded from rising interest charges, at the head of the queue to buy stock, and flexible to act opportunistically and make acquisitions as distress situations arise amongst competitors.

Textbook theory tells us that the valuation of a business is a sum of the future cash flows of a business discounted back to present day net present value. We are now in a world where the discount rate, or cost of capital has gone up and significantly. The maths will then result in a lower net present value and value for the company. On top of which could be lower future cashflows if the business is suffering.

This can lead to a standoff or valuation gap in an M&A context. Vendors are often reluctant to accept that lower valuations apply to their marvellous unique business. Purchasers are prepared to pay less given more expensive finance, coupled with potentially more risk attached to future cashflows in meeting expectations.

The upshot has been a dearth of M&A activity both in the public markets and by private equity. In the latter case there is a pre-occupation with focus upon their current investments, with focus upon the cyclical ones that have not performed and may need further equity funding to stay viable and stave off covenant breach.

Where there has been activity recently has been on the London public market. The valuation of many listed companies has fallen significantly as earnings have declined through the economic cycle re-asserting itself. The company may be well run, before and now, yet it’s market value and rating have declined.

This situation has been the cue for private equity to pounce on ‘cheap’ decent companies in certain sectors caught up in the general malaise. This trend has been evident in the UK, as London valuations are generally lower than US-listed counterparts. This trend is causing much soul searching in The City around the attractiveness of a listing in London with the continuing obligations coming into focus as considered onerous in some quarters.

For if you cannot raise equity, why have a listing? So head off to private equity, out of the public limelight, the excessive governance requirements, the constant grief over executive pay, the obligation to produce a 200-plus page Annual Report, and where you can just get on with the job and get back to being entrepreneurial.

A London listing was formerly the gold standard in setting valuation benchmarks and accessing equity finance. That is probably not the case anymore. It is part of a wider debate on UK competitiveness.

It is not all doom and gloom. The recovery may be insipid but unemployment remains low, skill and staff shortages abound, so in the mix there must be some winners.

Martin Towers is the former finance director of Kelda Group, which was the parent company of Yorkshire Water, and former CEO of Spice PLC. He is now an early-stage business investor.