Last week we received the welcome news that the London Stock Exchange is launching a new market for fast-growing companies called, rather drily, the ‘High Growth Segment.’
The market has been designed to encourage more fast-growing European companies to IPO in London rather than looking to the US either for a buyer or for their more dynamic public markets. Companies can qualify by having a market cap of at least £300m and growth of more than 20% for the last three years.
The attraction is that this new market will be seen as a stepping-stone to a listing on the main market. At the same time the ‘free-float’ requirement will be just 10%. This answers one of the main objections to the main market where the free-float minimum is 25% leading to fears amongst founders of fast-growing businesses that they are giving up too much too soon and will lose control of their business.
Ultimately, the plan is to make London more comparable to the NASDAQ in the US that has served as the home for many of the world’s leading technology companies including Amazon, Apple, Google and Oracle.
It seems more and more European companies are looking to the NASDAQ as the best path to liquidity. Ben Rooney in the Wall Street Journal wrote that Bruce Aust of NASDAQ revealed that there were “twenty companies in Europe looking to access U.S. markets… something I have not seen in several years.”
London’s new ‘’HGS’ market will certainly make qualifying companies take a closer look at London as an IPO market which is definitely welcome news for all those wanting to see Europe create big and sustainable businesses on a global scale.
However, the remaining challenge is that the London market will also need the right levels of analyst and investor support if it to be successful. Currently there are very few analysts in the UK and Europe who really understand and research the technology market.
Additionally, we will need investors prepared to buy into these companies at competitive valuations. To do this, investors will need to value growth and have some conviction that this will turn into profits further down the line. Unfortunately, these are alien concepts for most European investors who are more used to valuing current performance and afraid of looking too far into the future.
Can you imagine European investors buying into the vastly unprofitable Amazon and Yahoo IPO’s in the late 1990’s? Amazon has gone on to become one of the most successful IPO’s of all time despite being barely profitable to this day. Amazon is a true poster boy for the Nasdaq and for US investors’ willingness to back growth and scale over profits. It also serves to remind us of how far Europe will need to change to compete.
But this is an important first step for European IPO’s. It will lead to more tech companies deciding to list in London – although how many is impossible to say. And once at least one of these companies has a successful entry into the public markets it will bring more investors into the market and encourage further investment on the analyst side.
It will be a long and slow process before the UK has a competitive market for tech IPO’s but, nevertheless, this is an important first step and we commend the government, the LSE and all those who have lobbied to make this happen.