Why are there so few UK IPO listings and what could we do about it?

April 19, 2023 Ben Yeoh

Dealogic, internet searches. Potentially not exactly accurate but I feel about right.

Why are there so few UK listings and what could we do about it?

I found this FT article by Katie Martin and Harriet Agnew as a useful surface initial take on the UK market and its lack of IPOs / technology IPOs but I felt the arguments were slightly conflated and possible root causes were not clearly articulated.

I will suggest:

This is not solely a UK observation, but all non-US countries have this phenomenon e.g. Japan, Germany and Canada.
That Canada has few IPOs (and few tech or biotech IPOs) suggests that the type of Canada asset owners, pension funds is not a strong explanation for this phenomena

Regulation and risk appetite plays a part, but I will suggest that is a more complex weave of(1) cluster/agglomeration effects (2) Success begetting success allowing buyouts and solo VCs (3) depth of capital markets (4) Historic UK listing rules, and in biotech, unlucky/unskilled early buyouts as the causal reasons for this phenomenon.

Unfortunately, if my diagnosis is correct then current policy ideas in liberalising pensions will not be very effective for increasing listings (though there are other reasons on why to do this). My best policy ideas are politically untenable (or not very tenable at best) as they involve investing in both people and places in current clusters (which would exacerbate inequality regionally), allowing more immigration, allowing and educating for higher risk appetite, and allowing vastly easier permitting for new buildings/infrastructure especially accelerator hubs. These ideas are mostly upstream from investing, as they deal with the root causes of growing real businesses but there could be some help around VC and growth equity clusters in investment.

What the data on VC, IPOs implies about the strength of the US vs everyone else

I am going back pre-pandemic (non-recession) to 2019 as a baseline year (not cherry picking it seems approx representative).

- UK: 59 IPOs

- Canada: 57 IPOS

- US: 237 IPOs

- France: 48 IPOs

- Germany: 35 IPOs

- Sweden: 26 IPOs

- Australia: 71 IPOs

- Japan: 75 IPOs

- China: 183 IPOs

Basically UK and Canada have the same approx number of IPOs dwarfed by the US. Canada and UK have same ball park GDP/capita (US$45K Can, US$42K, UK; 2019). So not too strange. (I will note that US listed company formation is also falling as a long term trend, which is another story, but may relate to regulation and the advantages of remaining private longer)

The split in tech / biotech, is not too far off either

| Country | Sector | Number of IPOs |

| --- | --- | --- |

| Australia | Technology | 5 |

| Canada | Technology | 11 |

| Canada | Biotechnology | 10 |

| France | Technology | 11 |

| France | Biotechnology | 5 |

| Germany | Technology | 10 |

| Germany | Biotechnology | 3 |

| Japan | Technology | 15 |

| Japan | Biotechnology | 3 |

| UK | Technology | 13 |

| UK | Biotechnology | 4 |

| US | Technology | 60 |

| US | Biotechnology | 70 |

(I am sourcing from the web, dealogic, investment associations, exchanges, so data might be a little off but seems about right).

So the success of Canada pension funds is a separate phenomenon to the listings in Canada. Indeed Canada funds invest worldwide and not only in Canada (CPP has a large London office)

While there may be benefits from tilting UK pensions funds to Canada style, more UK listings or more formation of UK tech companies is unlikely to be an outcome.

I will come on to what pension reform might help, but lets look at the state of venture funding.

The UK actually does better than Canada (deal book data, so take with a pinch of salt) in Tech and biotech, data might not be exactly but order of magnitude looks correct. Again US is the stand out for venture funding.

Venture Funding:

| --- | --- | --- | --- |

Lets focus on biotech an area I know and where the UK has some success.

In the article Sir John Bell (speaking re: immunocore) argues:

There wasn’t really any access to long-term scale-up capital in the UK ecosystem,” he recalls. “UK venture capitalists didn’t have pockets deep enough” and domestic pension plans “had no interest” because they are “too conservative to invest in the growth sector”. The result, as he puts it, is that “the most successful British biotech company is now really plugged into the American capital markets”.

(aside that people would argue on what the most successful British Biotech company is…) I think these comments ring true to a degree, so the FT and we should examine them.

However, the second part of the comment already part falls away as we see that the Canada pension fund system has not helped raise Canada Biotechs. (I will come back to the pension question later).

So we don't have enough UK VCs with deep pockets, but looking at the above table no country really does except the US. Hence the best companies going to the US. What is also generally accepted (IMHO) is that US valuation for tech and biotech will be higher, and that US VC and growth equity players will invest at larger amounts and potentially faster.

There is also more opportunity to exit to large trade players, or to IPO, and US VCs (arguably) social capital network effects, as well as management and business help in some cases.

The UK is not in a position to fully replicate that, and neither is Canada. What could the UK part replicate?

It could replicate seed and early stage venture most easily perhaps because the amounts of money involved are lower, and the risks remain sky high (1 in 10 to 1 in 100 seed successes maybe would be an OK hit rate).

The UK could look to the YC - Y combinator programme - and try and replicate something similar. It has a couple of such networks eg Entreprenuer First, but it could do with a few major YC clones. (A YC cofounder Paul Graham currently lives in the UK).

But what are the conditions for a YC? Those conditions are high talent people, and cluster effects. So, you want to be very people friendly (immigrants) and invest in infrastructure around the Oxford-London-Cambridge triangle - allowing much easier permitting of buildings etc

I would go so far as to suggest you could build a site much like Greentown Labs, near Boston. This is an incubator hub, which I have visited (see here The idea clusters young companies together, near a cluster zone and allows for agglomeration effects as well as talent and skill diffusion. Money required is not too large £500m could start 5 clusters I imagine, although then there is the people/place debate.

I think this foundational level policy on cluster hubs is possible but would take 10 years to form companies. If you are a UK pension fund looking for a VC allocation, what would you do? You would mostly not look at UK VC or growth equity.

You also need to understand the investment objectives. The objective of MIT or Yale endowment or the UK Wellcome Trust more easily allows for VC and growth equity allocations, along with the regulation that allows it.

There is some truth to regulation not being able to change the culture or the risk appetite of an investment committee. For instance, MIT Endowment will give 5m to 50m allocations to solo fund managers, or emerging managers with limited track record, but investment philosophies which fit their style. I cant imagine most UK pension funds trying that. Also, there is a very strong angel and solo VC network in the US, which is lacking everywhere else to the same degree. The angel network gives people a chance to get funding but also to see venture investing in action.

A 1bn UK pension fund or endowment could allocation 50m to venture (5%) capital but would need to overcome (1) risk appetite (much of that money might fail) and (2) how to find and assess a manager - even if the regulations allowed. I suggest such funds would mostly likely tilt to US managers (deepest widest choice) and that the cost of such good capital allocators would not match what the MIT Endowment pays its staff.

I wanted to touchback specifically on UK biotech because there were policy mis steps that we can not do anything about now.

First 1980s listing rules made it hard for unprofitable biotech to list and gain access to more capital funds without a larger partner. This was a costly mistake.

Celltech and Cambridge Antibody made great discoveries but the commercialisation value actually fell to other parts of the chain. It’s too long to look into their history, but biotech equity investors and those involved know the stories of what happened. Without those biotech champions, the UK relied on AstraZeneca and GlaxoSmithKline as the big pharma bell weathers, and again there is a long and interesting history there, of recent note is the AZ move of much of its R&D from Macclesfield to Cambridge. Much harder to attract world class scientists to live and work around Macclesfield.

Long story short, it turns out the US has lot of biotech success stories, causing a positive reinforcement cycle whereas the UK (and Canada) have very few. Again this is now not something policy can easily reverse.

In any case back to the policy options being discussed.

I am in favour of allowing pension funds more flexibility in how to invest. THis is because:

-most policy people know little about investing and the rules they conjure are often not helpful

-this flexibility will likely help meet investment (and possibly other) objectives

(see eg. Cornwall Pension Fund has launched its new Cornwall Local Impact portfolio to channel LGPS investment into affordable private rental housing and renewables in the county. Cornwall Pension Fund, a member of Brunel Pension Partnership (Brunel), commissioned Brunel to design, implement and then monitor a portfolio that pursues local impact investment across both social and environmental priorities.)

BUT, this will not cause a boom in UK IPOs or company formation. Availability of capital is only one part of the equation (cf. Canada, France, Japan etc) and in fact, directing UK pension funds by dictat is a recipe for going wrong (for the same reasons why I support liberalization, govt policy makers are not close enough to market or investment thinking).

The best way of increasing UK company formation, IPOs and the like is to support both place and people based policies, immigration broadly, and to tilt UK (business) culture to revere the entrepreneur, the start-up, (the capitalist ?!), the inventor, the investor which is not politically tenable.

My only potentially tenable ideas is to recreate Y-combinator, and, or a GreenTown Labs Cluster at seed stage.

My crazy suggestion would be for all 15 year olds to take a 2-3 month course in business economics, and equity investing, and audit the YC start-up school. That would be practical maths!

Want more econ/policy thoughts:

Check out Stian Westlake on intangibles

Or, Diane Coyle, on UK economics

Or, Mark Koyoma on economic history and why the world is rich.

Some notes:

YC start up school is here for any would be entrepreneurs

VC has a very low hit rate, 1 in 5 would be very good, and 1 in 100 completely in line. That means you might lost 80% of your capital. However, the “hit” can be 1000x your investment and produce great returns also for society.

Climate Tech VC also has great co-returns

Growth Equity is also lacking. This is the scale up stage, that Sir John Bell alluded to.

Returns on growth equity should be 1.5x to 5x possibly 10x at earlier stage, but the risks are lower. You should be looking at a least a 60% hit rate at a decent firm.

You do need owners of assets to be comfortable with that form of risk over the long-term, and that needs a culture shift.

You can look at what successful organisations do eg Wellcome, Yale, MIT, Canada funds but while regulations might permit they are driven by great talent with well articulated investment philosophies they will go to the best managers and asset classes, and will not necessarily be shaped by geographic constraints

If you pass by Oxford and Cambridge, the amount of unproductive fallow fields is amazing. We should be building on them.

It is not hard to get a view by speaking to investors or to companies. Preferably both.