Compared to the dizzying, cheap-capital-fuelled heights of 2021, London’s IPO markets had a relatively slow 2022. Just 45 companies across all sectors completed an IPO in London last year, compared to 126 in the year prior.
Global conflict, political instability, and spiralling inflation – among other factors – have contributed to last year’s slowdown in UK initial public offerings.
The change becomes starker when looking at tech IPOs. In 2021, blockbuster public listings from the likes of Darktrace, Deliveroo, and Wise helped UK tech IPOs raise £6.6bn out of a total £16.9bn, according to government figures.
In contrast, London IPOs raised a combined £1.6bn in 2022 without a smorgasbord of household tech names making their public market debuts.
Fears over the economy, along with a drop in startup funding and valuations, have left a cloud of uncertainty hanging over London’s IPO markets in 2023.
Some tech companies that had been targeting a 2023 IPO have openly hit the pause button. One of those is Durham-based challenger bank Atom, which is now eyeing 2024 or 2025 for an IPO or “liquidity event”.
Cambridge-headquartered semiconductor company Arm, considered a jewel in the crown of UK tech, has been lobbied by successive prime ministers to choose London over New York for an IPO. Consequently, it has become a barometer for both London’s ability to attract marquee tech listings and for the overall health of Britain’s public markets.
“London’s future as an IPO hub seems to be hanging in the balance. The deciding factor is whether UK tech firm Arm will decide to choose to list in the capital instead of skipping across the Atlantic,” Rhys Merrett, account director at business consultancy company The PHA Group, told UKTN.
Merrett said that considering “recent financial trends”, there are “good reasons to second guess what lies on the horizon for the capital”.
He added: “Should the UK fail to attract Arm or similar high-calibre listings, this might damage the city’s credibility as a tech hub, impacting domestic innovation and productivity.”
London v New York
The transatlantic tug of war for Arm is emblematic of a long-standing problem for London’s public markets. Tech and digital companies have often spurned the UK for the tech-heavy Nasdaq exchange in the US, citing more favourable trading conditions.
The London Stock Exchange is aware of this and in recent years has made efforts to incentivise London IPOs.
To some, there are clear strengths that the London Stock Exchange can emphasise to boost its tech standing this year, particularly if it favours a different kind of IPO to the big-money tech firms that went public in 2021.
Barry Downes, managing partner at Sure Valley Ventures, pointed to companies being able to IPO at an earlier stage in the UK using London’s alternative markets.
For Downes, the AIM market – a subset of the London Stock Exchange – could be a fruitful resource for early-stage tech companies.
“If you look at AIM, it’s a relatively low-cost IPO in terms of ongoing fees, it’s a well-regulated market, and there is more and more tech in that market as well,” he explained.
He added that AIM could become a “feeder system” where “instead of doing a private Series B”, a company could “IPO for its Series B and then they could continue to grow and raise capital”.
According to Downes, most founders currently “have a thought process in their head to keep doing private rounds, and then exit to a Silicon Valley company, or to keep doing private rounds and at some stage go to Nasdaq”.
Will London IPOs pick up in 2023?
Because of these advantages, Downes believes London IPOs might “pick up at the back end of the year”.
But beyond the quantity of London IPOs this year, there is also a big question about quality. Most of the notable London tech IPOs in 2021 had been performing poorly in terms of market capitalisation even before the wider tech rout, which has wiped trillions of dollars in value from US giants such as Meta, Google and Microsoft.
Companies looking to IPO in 2023 will therefore need to approach an IPO differently to prior years, Downes said.
“The public markets are always open to good companies,” he explained. “Public markets are focused on things like revenue and profitability, so they’re always open for a good company that’s got decent revenues and decent profitability.”
Some UK tech companies that went public in 2021, including food delivery app Deliveroo, are yet to turn a full-year profit.
According to Forward Ventures partner Luke Smith, there is potential for IPO recovery in 2023. However, the poor performance of certain 2021 tech IPOs – including Made.com, which went into administration and ultimately collapsed last year – will continue to put firms off of the IPO market in general.
“I think it might look a little brighter, but I wouldn’t be pursuing any massive improvement for a while. The challenge is that a lot of the recent tech IPOs just haven’t performed well. And it’s going to take time for investors to want to come back,” Smith said.
“And when they do, they’re going to kick the tires a lot more carefully. For the near term, barring companies that have really solid fundamentals, the IPO market’s just not going to be as attractive.”
So far, London tech IPO activity in 2023 has been muted. Scott McCubbin, UK&I IPO leader at EY, said the combined factors of “inflationary pressures, rising interest rates, supply chain issues and weaker consumer spending due to high energy price rises” have caused “depressed IPO activity early in the year”.
While there is a tendency to compare growth on a year-over-year basis, it is important to consider the bigger picture. The number of London IPOs in 2022 may have plummeted by 62% compared to 2021, but the volume is still roughly double that of both 2020 and 2019.
In other words, 2021 was something of an anomaly. It was the peak of a bull market created by unique macroeconomic factors where many companies took the opportunity to cash in.
But there may yet be hope for a bounceback in 2023. McCubbin said there remains a “pent-up demand for IPOs”, which could lead to an “upturn in the market in the second half of the year”.
The caveat, however, is if the economy “avoids further geopolitical shocks”.