Is the UK IPO Market Doomed?

Hello and welcome back to The Deal Room, and I think you're going to really enjoy this conversation.

Why?

Because it's going to save you a lot of time and effort, and who does not like that combination? And the reason why is because Stephen, as ever, is joining me on this call, and he is going to unpack names like EY, Goldman Sachs, Morgan Stanley, Reuters, BCG. All of them put out lots of fascinating and long reports about things like dealmaking and the IPO market. But we're going to specifically turn attention this time to the UK. And Stephen, I know you're going to unpack all of this and save us time for sort of reading these fabulous documents into something that we can understand and digest, uh, and connect it to what's happening on the ground here in the UK.

Yeah, absolutely. And You know, you might want to put all of this stuff into ChatGPT, but what's the fun in that? Let's let me be your ChatGPT into your ears. And, and there's a specific focus here. I'm, I'm all over the UK. You know, we're based in the UK. A large listenership is UK-based and certainly young people looking to find jobs in the UK. And it is so easy. To take the plethora of headlines that we're seeing in the US, bombastic tones, you know, Doge, Trump, all of this tariffs, all of this stuff. And you're kind of thinking, well, yeah, that is quite exciting, but how relevant is it to me day to day? I really want to know what the outlook is for UK PLC because That's where I live and it's a country that's very close to my heart. So yeah, we have scoured through a lot of reports here and we're going to talk firstly about M&A and private equity in the UK, and then we're going to hop on and do some IPO stuff as well.

Yeah, I feel like the UK has had a bad rap in the last 12 months, but it feels like there's been a bit of a sea change, I guess, at least in what people thought 2025 would look like on a global dealmaking scale and level in terms of activity. But yeah, I'm sure I'm going to be in for a bit of a surprise, I hope, about how the UK's been performing.

Yeah, absolutely. And yeah, the UK's definitely been— it's been the kind of post-Brexit, it's been the— it's been in a bit of a sorry state. And there are definitely more bad news articles than there are positive news articles in terms of, you know, corporate finance action and the performance of the FTSE 100 and IPOs and things like that. But let's maybe try and take a slightly more positive outlook, and we're going to start with M&A in the UK. And, and by the way, there's a lot of data here, um, and some of that data is Europe-specific, but I'm going to try and focus as much as possible on UK-specific data. The first image that I've got in front of me, and I'm going to drop a couple of names here because they're really useful data sources. The first image is the Dealogic M&A year on year. It's a map of the world and it shows M&A deal values year on year, year to date. So I can see in front of me that US year to date, year on year M&A deal value is down 29%. But I can see in front of me also that Europe's up 6%. Globally, we're down 6%. So Europe, again, just trying to take that counterpoint between certainly the UK and Europe and, and the US. Then I moved on just to get a little bit of a sense of where we're at at the moment. BCG, another name to drop, do a really good M&A sentiment index where they interview, you know, 1,000 CEOs from across the UK or across Europe. And the sentiment index, the average being 100, the sentiment index in Europe is only at 66. So we're still relatively bearish on all things M&A from a European perspective based on the sentiment index. But let's take a little bit of a look at where we're at with the UK. And 2024 was a pretty good year relative to 2023. So the UK M&A market has been building momentum with deal values rising 37% in 2024 relative to that horrible year of 2023. That's pretty nice. The leading sectors, financial services M&A, technology M&A, Uh, media, M&A, services, all the things that you would expect UK PLC to actually have a bit of a comparative advantage. And we're going to talk about a couple of the reasons behind why performance has been pretty good. And again, I'm going to mention the US a little bit, but one of the key drivers to more, you know, slightly more, uh, slightly more momentum in the M&A market. One of the key drivers is the weak pound and US acquiring UK companies. And this is a, we would call it a kind of, in the world of M&A, you would call it multiple arbitrage. If you are a company in the US that on the S&P is valued on a 20x price earnings multiple and your like-for-like peer in the UK because it's on the London Stock Exchange, it's valued at a 12x price earnings multiple, buy that company, soak that 12x multiple into a 20x multiple business and take the difference. And that's been a big reason why UK M&A has increased, and that will continue into '25. Other reasons? Well, We have seen a softening of interest rates, as we all know, small but not insignificant. And at least the momentum is in the right way. Inflation, well, you get one positive inflation report, one negative inflation report, and you are a better place than me. But if you just look at it from the charts, you obviously have that mega spike in '21, '22, and then we've been rolling down to that 2.5%, which doesn't worry people so much. Then you combine the kind of more stable political environment than maybe other parts of the world. You know, I'm not saying that the UK is a, is a bed of roses, but it's certainly a more stable place to do business than the US at the moment. There is some visibility. We're pretty sure that Labour will be here for the next 4 years. And I think what we will about their policies, at least we know that there's probably going to be some consistency as well. And then that kind of drives interest from not only, you know, not only US buyers, but also, you know, there's a lot of pools of money out there, you know, and we, and we talk a lot about the US, but what about the Middle East? Still investing very heavily into the UK. And there's been lots of, there's been lots of kind of small pockets of evidence that money is starting to feel more comfortable being placed back in, as I quote, UK PLC.

When we, when we talk about M&A in this context, are we talking about a company buying a company, or are we talking about a private equity firm buying a company? Just so I'm clear, what does this capture?

Yeah, really good question. It is any entity buying any other entity. So it could be a private equity fund. that, that counts as part of the M&A data. And maybe we can, we can talk very quickly, we can move on and talk very quickly about private equity, uh, M&A and its really, really driving force, certainly in the US. But again, we're focusing here on the UK, and there's lots and lots of different things that contribute to private equity dealmaking happening. And quite a lot of those things are starting to look more favourable in Europe and in particular in the UK as well. So I would say, again, to name drop, I would say that if you're keen on all things private equity, go to the Bain 2025 Private Equity Report and you can steal most of my really, really good stats on that report. It's really, really cracking. So, I'm going to again go between '23 and '24 and then look forward. So from a private equity perspective, and this is global, then I'll go Europe, then I'll go UK. From a private equity perspective, deal value has increased '23 to '24 by 37%. Exit value has increased by 34%. Interestingly enough, funds raised by new, by private equity firms, new fund creation is down 23%. And that's because, by the way, global buyouts, dry powder, i.e., money that has been committed to a private equity fund that has not yet been spent, it peaked in 2023 at $1.3 trillion. And it's gone down to $1.2 trillion. So there was a rise and it's slightly tailed off, this dry powder, because more money is starting to be deployed both in the US and in Europe. Why is that? Well, I've got two more charts for you. One chart that I'm looking at, and this is focused on Western Europe. This is a chart looking at the EV enterprise value to EBITDA multiple of private equity acquisitions. And obviously if you are trying to sell a company, if you're trying to sell a private equity-backed company, you want that multiple to be as high as possible. And the low multiples, especially across Western Europe, have been one of the real sources of this bottleneck in private equity deal flow. But this EV EBITDA multiple has been creeping up, creeping up and creeping up and creeping up to the extent that the 2024 EV EBITDA multiple of 12.1 times is 11% higher than the 5-year average. So maybe this is saying, all right, These hundreds of private equity-owned companies, maybe it's a good time— that are owned by private equity, maybe it's a good time to sell. Maybe this higher multiple is going to make my economics work. Combine that with another driver, which is the cost of debt for new private equity acquisitions. Leveraged buyout yields in Europe are significantly down on 2023. They're down to about 9.5%. This is slightly higher than the US, but you can see how some of these more global or European trends are starting to trickle down into the UK. So UK private equity deal activity bottomed out in 2023, which was an all-round shocker of a year, but rebounded significantly in the second half of 2024. And now I can give you many, many different explanations for this. Again, I am going to focus a little bit on the US. I have conversations with private equity colleagues all the time. US funds are looking at UK targets. We mentioned a few weeks ago on the podcast about Japan being a very fertile place for private equity due to the strength of the yen and all of these different factors. But the UK is not far behind. Multiples are relatively low. Quality of business is relatively high. The pound is relatively weak. So if I'm a private equity firm, and I could buy, let's say, a US industrials company at a 15x EV/EBITDA multiple, or I could buy a very similar looking industrials company in the UK for an 8x EV/EBITDA, and the cash flow projections are relatively similar, plus you've got a brilliant— you've got a strong dollar and a weak pound. That starts to make UK assets much, much more attractive from a private equity perspective.

So just a question. There was an article in the FT, and I wonder, is there any connection here, or are the two things completely different? And it was talking about private equity, and the FT headline was talking about, for the first time in nearly two decades, private equity assets under management have fallen. And a couple of the stats that they were talking about was even during the 2008 financial crisis, the industry still managed to grow. But last year was a turning point. And two of the stats there were $4.7 trillion in assets under management. That's down circa 2% year on year. And then there's a $3 trillion backlog of unsold deals.

Absolutely. And what you'll see, and this is a little bit maybe, you know, from a career's perspective as well, is that The big private equity firms are performing terribly because they bought companies at the top of the market and they cannot offload them. You know, this $3 trillion of backlog, they can't offload these companies without taking a hit. So what do you do? You do a continuation fund, you do a recapitalization, but you don't sell that company cuz you can't get the multiple. So this is the reason why. Total assets under management are softening and actually decreasing because private equity, and by the way, that number I think that you quoted was for private equity buyout funds as opposed to the whole kind of private equity alternative asset space. But these have historically been relatively niche strategies and relatively, I wouldn't call private equity a cottage industry, But it's grown so quickly and become industrialized and maybe commoditized in order to react to the demand from investors that are seeking yields that actually probably a lot of private equity funds have got too big, raised too big a fund, are overpaying for deals because there's pressure to use capital. And actually the business model of private equity is starting to creak. And I'm going to bring that back to the UK. And one of the most interesting trends that I'm seeing, I don't have this in a nice flashy Bain report, but one of the most interesting trends I'm seeing is this move from large-cap private equity buyouts, i.e., billions of dollars, you know, big take privates that haven't actually been that successful over the last few years to a focus on mid-market. And lower mid-market as a place where private equity, private equity can still do really, really great business. And to couple that with another trend that we're seeing, by the way, if you have a private equity interview lined up, this kind of stuff is gold. Another trend that we're seeing is this buy and build strategy. So a classic private equity trend is buy a company in a fragmented industry, use that company as the vehicle to go and buy a load of other companies. Benefit from consolidation, economies of scale, etc., brand awareness, etc. This is happening every single day, especially in things like professional services, small fragmented insurance brokers, accountancy firms, law firms, etc. It's even happening in service companies, plumbers, electricians, you know, all of the, you know, gardeners, landscapers, all of this stuff. Roll-up, buy and build. If you mention those words in a private equity interview, you're going to be fine. And it just so happens, by the way, that the UK has got a pretty strong middle market. We don't laud our massive trillion-dollar tech companies. We've got a relatively strong middle market and we've got a brilliant professional services industry. So this is actually another driver as to why, especially UK mid-market, it's definitely an attractive space to be from a private equity perspective.

Perhaps to use as a, as a segue then to talk about IPOs. Another article I saw last week was talking about Carlyle, and there was an interview with Carlyle Group, and they were talking about their anticipation to ramp up the pace of IPOs as it's eyeing up to $5 billion worth of exits this year.

Yeah, it has to, right? You know, the pressure is on for capital to be recycled. And we always talk, you know, when we're teaching trading— and, and you'll know this a lot better than I do— we always talk about this concept of the stop loss, right? From a, from a kind of trading or investing psychology thing, it is so hard to accept that you're on the wrong side of a trade or you've invested in something that's going slightly south. Or isn't going to realize the value. What could you do? You could double down and get yourself further into a hole. What should you do? Get out, get out quickly, get 0.8 times your money in order to be able to put that money into something useful. Remember, money's important as an accelerant of time. So if you can, the worst thing you can do is spend 5 years making a loss. A better thing you can do is spend 6 months making a loss. The best thing you can do is obviously make a profit or make a return on your investment. So yes, Carlisle might be peeling off the bandaid and going, look, we want to do some IPOs. The market's not bad. The IPO market certainly recovered quite a lot in the US. Valuations are decent. I know we bought at the top of the market in 2021, but you know what? We might be able to walk out. Remember private equity models, you only put in a small percentage or a modest percentage of your own equity into an acquisition, into a leveraged buyout. You use a lot of debt. So even if you buy a company for $1 billion and you sell a company for $1 billion, you might well actually make a little bit of money through paying down your debt and having a different capital structure. So yeah, let's talk about IPOs.

And on IPOs, I was just quickly, as you were talking, trying to find a really cool graphic that I saw The Visual Capitalist. If you've never been on that website, it's just a really cool way to express information in a very visual infographic type way. And there was one that they released last month and it was the IPO market, generally global IPOs in 2024. And there was, I'm just counting now, there's 1, 2, 3, 4, 5, 6, there's like 10 countries here and there's a tiny little dot there's one that's significantly smaller than the rest. And you look close enough, you can see the UK just coming in at 0.9 billion. And then there was countries like Saudi Arabia, Malaysia, Hong Kong was 11x the size of the UK, uh, South Korea bigger, Japan, China, and then you've got Europe, obviously US. And then surprisingly, do you know who was number one global IPOs last year?

Gosh, I have no idea.

India.

Hmm. Is this volume or value?

Very good question. This is volume. So India had 327 and IPO proceeds in dollars were $19.9 billion. The US by comparison had only 183 IPOs, but the same of $32.8 billion. So considerably higher value. Yeah.

Yeah, it's, it's super interesting. And again, I am going to try and present a less bearish case for the London Stock Exchange. Um, so I'm gonna start by presenting the facts as they are, and then we're gonna talk a little bit about what makes a really, really fertile, uh, exchange for an IPO and maybe give a little bit of positive spin. So 2024 activity, as you rightly said, the London Stock Exchange recorded only 18 IPOs in 2024, down from about 23 in 2023 and 45 in 2022 and 126 in 2021. So a really precipitous fall. Um, just as, as a reminder, the, the US had 183 IPOs. More concerningly, and I think this is really important to note as the kind of next layer of analysis, you have your IPOs, but again, think of the LSE as a kind of bucket of water, right? You have IPOs filling up the bucket, but then you have delistings taking water out the bottom of the bucket. They're holes in the bucket, right? And the LSE faced 88 delistings in 2024, the highest since the global financial crisis. And I put a chart in my notes that from Statista, which is obviously a great resource for all of us to have, showing the decrease in the number of companies year on year, the decrease in the number of companies listed on the London Stock Exchange. And it is basically just a downward curve from about 2,400 in 2015 through to about 1,680 in September 2024. Uh, so there are some clear structural challenges going on, and by the way, Brexit caused a huge, huge decline, as you would probably expect. So we've got to think about, all right, is the LSE doomed? Is UK PLC from an IPO perspective pretty doomed? But I don't know, like, let's take a look at what makes a good IPO market. Number one, you need good valuations, right? If I am a company that is operating with a global presence or somewhat a global presence, and I could IPO in the UK at a 10 times price to earnings multiple, or I could IPO in the US at a 15 times, the temptation is to go for the US. And analysts project that the FTSE 100 price earnings ratio is going to be just over 11 times in 2025. On average, compared to approximately 22 times for the S&P 500. So if you're one of these companies looking at that particular statistic, you're going to be like, oof, all right, I'm going to go to the US. And we've seen this, talking about this delisting piece, we've seen this with Paddy Power. If you remember, the Paddy Power owner Flutter moved onto the New York Stock Exchange. TUI, the German travel company, moved from the LSE to Frankfurt. The £20 billion market cap Ashtead Group is shifting their primary listing to the US, attracted by higher valuations and deeper capital pools. And obviously the big one that we saw last year was Arm, not necessarily delisting, but choosing to list in the US as opposed to the UK. But I'm going to give the counterpoint because this is a pro-UK episode. Valuations, and this is from Pinscher Masons, which is a law firm, very good law firm based in the UK. Valuations are not always better in the US. So if you take the 22 times price earnings versus the 11 times price earnings, FTSE 100 versus S&P 500, that's super misleading. Because you're not comparing the exact same profile of companies. You've got really, really high growth, high margin businesses in the US that are attracting massively high multiples. So there was a piece of analysis done which basically says that on a like for like basis, if you compare a boring, slow growth UK FTSE listed industrial company with a boring, slow growth US industrial company, the actual multiples, the valuations are pretty similar. It's just that the US has more higher value companies dominated by the Mag 7. So again, when it comes to analysing this data, don't just look at the headline, try and get that next level just to see.

While that makes rational sense, like in trading, deal making and the perception of value, isn't always rational. And so I know a lot of companies that they do, even like building companies. I remember there was one British one, I think it was, it was Irish-British, or that decided to list in the US for a bigger multiple. So why would someone pay if that made sense, which it does, as you've explained, why would a US have the perception of paying a higher multiple then? Surely it would just see it the same.

This is super interesting and it leads me directly onto my second point. So higher valuations, but potentially worth just checking that. Um, and again, we're kind of doing a UK versus US piece here. The second one, why are you going to list in the US or why you want to list on a stock exchange is strong liquidity. And actually in my notes, you'll see that I put a chart which has got the share price of CRH, which is the company that you're referencing, the building materials company. You can see the share price and you can also see the trading volume. Again, a proxy for liquidity. And CRH changed its listing status from UK to US in September 2023. Now, not only did its shares go up 68% from that moment, but you can see the average trading volume because it's on a more liquid exchange with more buyers and sellers. Has gone up significantly, which has a lot of benefits from a kind of price discovery perspective and from a focus on good news. Obviously has the inverse as well. So you've got, you want a kind of a well-traded exchange to create really, really good price discovery. And it looks like, and I'm going to give you the kind of high-level stats according to Bloomberg data in 2022, a couple of years ago. Total volume traded for the S&P 500 and NASDAQ 100 index amounted to over $50 trillion and $20 trillion respectively, whereas seemingly comparable statistics for the FTSE 350, 250, and FTSE 100 amounted to, in each case, under $5 trillion. So from face value, again, from face value, you are saying, gosh, the liquidity is so much higher in the US. Than the UK. But that's absolute. Let's dive a little bit deeper and look at relative liquidity. So the LSE recently analyzed liquidity using an alternative metric that is not the same as something like community-adjusted EBITDA. I think it's quite legitimate alternative metric called the average daily free float adjusted turnover ratio. I'm going to say that again. The Average Daily Free Float Adjusted Turnover Ratio, which is essentially the percentage of shares traded daily out of only shares which are outstanding and available to be traded. So it's actually looking at the kind of the pure, the pure like-for-like shares available to be traded versus liquidity in the US versus the UK. And I actually found out that Although the US is still a little bit more liquid on a per-share basis, per-share traded basis, it's much closer. I think it's like 0.96% in the UK relative to 100% in the US, something like that. So yeah, again, yes, liquidity's higher in the US, but also yes, let's take a kind of further look at the data.

So interesting. I was just thinking of that, that book on my shelf. One of them is Factfulness. Is it Hans Rosling? When he's talking about the kind of initial assumption of looking at information, but then the questioning. I love it. As you've peeled it away, you're like, all makes complete sense. It's whether or not you're of that mindset of to probe and be curious. But I guess these are all base characteristics of what a good analyst is looking at, right?

Totally. And we had an event yesterday at the Gherkin bringing together loads of universities and loads of our corporate partners, and we had a big chat about all things employability, you know, in the context of AI influencing both hiring decisions and the way that students put together their CVs and their application packs. And at the end of the day, the conclusion that we reached was these skills that we really, really want students or candidates to have, you can't really, you can't really showcase them in a, in a CV or a ChatGPT-derived cover letter or whatever it might be. These are the complex critical thinking, curiosity, uh, initiative taking that probably need a, a new and different way to try and survey, to try and assess. And it's that kind of thing. If I saw a candidate that I asked the question and I'm giving them an interview and they're applying for an equity capital markets position. Why is the US so much more attractive than the UK as a market? And you gave some of these types of second-degree answers. The headline is X, the reality is Y, my conclusion is I'm going to err more on the side of Y because of these reasons. Then you're starting to become an absolutely standout character. And it's quite hard to find that kind of information using ChatGPT.

Yeah, no, absolutely right. And so given the spirit of what you've just said, maybe to conclude then, we haven't mentioned Europe, and I just wondered how's the UK kind of shapes up against its European counterparts, given that's a little closer to home?

Yeah, it's a really good question. In terms of the size in terms of those two first points that I made, valuations and liquidity, you would say that the CAC and the DAX, the German, so the German Bourse and the French stock exchange, relatively similar, slightly, well, French is slightly smaller, but relatively similar dynamics. What might give the UK a bit of an edge is this third point as to what makes a stock exchange attractive. So the UK has made a real push to make listing a little bit less regulated or a little bit easier to do, and therefore a little bit cheaper. It is now significantly cheaper to list in the UK than it is in the US, and certainly less bureaucratic than listing in France. So again, if you're, if you're making a case for UK PLC, you know, there's a couple of relatively strong points. And maybe just to conclude with this kind of Europe-wide conversation, I just want to take a look at the kind of major indexes across the world. You know, we're beginning of March, time to probably do a year-to-date check-in just to see what the health is looking like that inspires our conversation on private equity, our conversation on M&A and on IPOs. So as of recording, which is the 7th of March, FTSE 100 here in the UK, year-to-date up about 5%. So pretty strong start to the year. We're not yet at the first quarter and we're already up 5%. Actually, the CAC 40 in France is up 10%. The DAX is actually up 15%, which is quite staggering. And we here had— think about the macro implications. There's a new chancellor talking about multi-billion dollar military spending on German companies. There's a lot of momentum there. I'm going to finish with the fact that the S&P 500 is down 2% year to date. So let's just maybe reorder our headlines away a little bit from the Trumposphere and bring ourselves back to the fact that some stuff is happening elsewhere in the world. And some of that news, although it's not unequivocally good news, I still feel there's reasons to be confident.

Oh, say, I was gonna say, let's find some US backing here for the big tech stocks. I say Tesla are down year to date 35%, Nvidia down nearly 20%, Apple down 6%, Google down nearly 10%. Yeah, it's been a brutal start for what are the linchpins of strength, or has been over the last year.

I'm going to stray away from my kind of very safe ground of deal making and IBD and things like that. I'm going to talk about markets. This fallout from the Mag 7, share prices down, as you mentioned, that is a good thing for one group of asset managers, and that is active asset managers, because they get comped against the benchmark. And the benchmark, if you don't have Nvidia in your actively managed portfolio, if you haven't had Nvidia, you are going to lose to the benchmark because Nvidia has driven that S&P 500 benchmark, if that, or the MSCI World as a benchmark to comp your performance against. So the fact that Nvidia, Tesla, etc., have massively dropped off, the benchmark's looking pretty average. So your relative performance, assuming you don't own those assets, is going to look quite favorable. So shout out to all of the active managers out there.

Yeah, and as per my last episode with Piers, connecting this to the reality of revenue streams, sell-side institutions in their trading divisions, given the macro volatility, it's going to be a good period at the moment, given what we've seen.

Totally, totally. Here we go. All right.

Thank you very much, Stephen. You can put your British flag down till the next time we meet and, uh, we'll reconvene. Thank you everyone for listening and we'll see you next week.

Thank you, Anthony Cheung.