In 2022, for example, the value of European listings dropped to its lowest point in a decade. At the same time, just 45 companies were listed in London last year.

When trying to explain the apparent demise of London and Europe, commentators point to factors like the ‘virtuous cycle’ of tech giants in the US which starved European and UK companies of much-needed capital in the early 2000s, causing them – and their investors – to fall behind their American rivals. At the same time, they say, the US benefits from a far bigger pool of capital just as UK and EU companies struggle amid a lack of domestic investment and a fragmented patchwork of national securities laws.

But although US capital markets are undoubtedly deep, liquid and significant, their performance does not always live up to the hype. In fact, for UK, European and Africa-based mid-sized corporates, London is often a more natural home. Here’s why.

Taking advantage of UK market size

According to S&P Capital IQ, as of September 2023, the New York Stock Exchange (NYSE) had 2,162 companies, with a total market cap of US$25.6 trillion, and the Nasdaq had 3,904 companies, with a total market cap of US$23.1 trillion. By comparison, as of the same date, the London Stock Exchange (LSE) had 1,881 listed companies – including both Main Market and the AIM market – with a total market cap of US$4.5 trillion. According to S&P Capital IQ, in 2021 and 2022, there were 599 and 121 IPOs in the US, respectively, (including both the NYSE and Nasdaq) of which 212 and 69 were special purpose acquisition companies (SPACs). In the same years, there were 126 and 45 IPOs on the LSE, of which 11 and 14 were SPACs.

While it is true that the US is a larger market than the UK and has been more active in recent years, this is not necessarily something that benefits all companies seeking to list. In the US, it can be more difficult for companies to stand out from the crowd in terms of size and sector. By contrast, London allows certain companies to be “big fish in a relatively modest-sized pond”, as one recent proposed issuer said. Across 2021 and 2022 (excluding SPACs), the median IPO size on the LSE was £170 million, compared to US$557 million on the NYSE and US$251 million on the Nasdaq, according to analysis of data from S&P Capital IQ.

In addition, in recent years, the LSE has floated companies across a more diversified range of sectors than Nasdaq and the NYSE – particularly in the sub-£2 billion market cap bracket.

Since 2019, more than half (54%) of listings on both the Nasdaq and the NYSE have been SPACs, with healthcare the next largest sector at 22% of listings, according to Pinsent Masons research based on LSE data and Stock Analysis. Consumer and technology focused businesses accounted for 8% and 7% of listings, respectively. Analysis of Stock Analysis and LSE data shows that, over the same period, the range of companies listing on the LSE was more diversified, with investment funds accounting for 27%; followed by technology, media and telecommunications companies (13%); mining (11%); healthcare (9%); financial services (8%); energy, diversified industrials and retail and leisure companies accounting for 7% each; and other industries accounting for the remaining 11%.

London has greater international reach

It is often said that the US has significant international reach; however, the data suggests that the LSE, in fact, has greater depth in terms of the number of companies with emerging or foreign market operations – with nine times more than the US, according to Bloomberg – and a more international investor base.

Since 2019, 25% of the LSE’s IPOs have been by companies incorporated outside of the UK (including companies incorporated in offshore jurisdictions), while over the same period 19% of IPOs on the NYSE were by companies incorporated outside of the US (with Chinese companies being the largest contingent). This may be due, in part, to London’s well-developed professional services market and its favourable time zone, which make it attractive for companies with extensive international operations looking to list. The internationalism of the LSE is also reflected in the revenues of the companies listed on it. In 2022, for example, around 82% of FTSE 100 revenues, and 57% of FTSE 250 revenues, were derived from outside of the UK. By comparison, only 40% of the revenue of the S&P 500 is generated from outside of the US, according to data from FactSet.

In terms of investor base, the LSE offers more geographically diverse shareholder registers than the Nasdaq and NYSE, with over 60% of investors investing from outside the UK (using the FTSE All-Share as a proxy for the London market). In detail, 40% of investors investing from North America, 17% from Europe (excluding the UK) and 7% from the rest of the world (excluding the UK), as of September 2023, according to LSEG Workspace data as cited by the LSE. By comparison, North American investors comprise 82% of the investor base on the Nasdaq and NYSE (using the S&P 500 as a proxy for the US market).

Non-US companies generally underperform on US exchanges

Foreign listings from Europe, the Middle East and Africa in the US have tended to underperform against expectations – especially where the US market is not central to the investment case. Looking at aftermarket US IPO price performance in the years 2018 to 2023 for companies raising over US$100 million at IPO (excluding SPACs) on the NYSE and Nasdaq, non-US or international companies (based on company nationality) have underperformed US domestic companies by 33%, according to Dealogic data analysed by the LSE.

In particular, UK companies have not tended to fare well in US IPOs. In the last ten years, only 23 UK companies (excluding SPACs) raising over US$100 million have chosen to IPO in the US and, on average, they are down 44.1% against offer price according to Refinitiv data as cited by the LSE. UK companies accessing a listing via a de-SPAC transaction have fared even worse, with simple average price performance down 87.6% against offer price. 

By contrast, the percentage of UK domestic (including Jersey and Guernsey) and international companies raising over US$100 million at IPO (excluding SPACs) trading up since its IPO between 2018 to 2023 on the LSE, is 27% and 29% respectively.  Examining the same group on the NYSE and Nasdaq, 30% of US domestic issuers have traded up since IPO, compared to only 17% international, in each case according to Dealogic data as cited by the LSE.

Non-US companies are unlikely to be included on US indices

The benefits of indexation in the US can be limited for foreign companies listed on US exchanges, and any UK or other non-US company listing on a US exchange will be considered a foreign company and, thus, is unlikely to be included on major US indices. For example, Nasdaq-listed British company Arm Holdings is being considered for inclusion in certain indices, such as the Nasdaq 100 Index, but its UK-based operations likely will present a barrier to its inclusion on the S&P 500. Although FTSE indexation is similarly limited for non-UK companies, the FTSE offers some flexibility for non-UK companies to be included. Further, any such restriction would not present an issue for UK companies listing on the LSE.

The S&P 500, for example, primarily includes companies incorporated or headquartered in the US because it is an index that is intended to reflect the performance of the US economy. To be included in S&P indices, a company must have a plurality of its fixed assets in the US, generate a plurality of its revenue from the US and have its primary listing on a US exchange. Further, market valuations of companies listed on Nasdaq and NYSE leave smaller companies at risk of being excluded from indices. Effective from July 2023, the S&P Dow Jones Indices updated the market capitalisation eligibility criteria for additions to the S&P Composite 1500 Indices, requiring a minimum unadjusted company market capitalisation of US$14.5 billion for the S&P 500. By contrast, the lowest valued FTSE 100 company is US$4.4 billion as of July 2023.

Post-IPO performance in the US is largely driven by indexation, with as much as 57% of US mandated assets under management passively tracking indices (compared to 39% in the UK), according to Lipper data as cited by the LSE. As a result of international companies being ineligible for certain US indices, international companies are more likely to underperform on US markets. UK companies also risk their FTSE indexation, as a UK-incorporated company with a dual listing would no longer be eligible automatically for FTSE indexation unless trading of its shares in the UK continues to meet certain liquidity thresholds. Further, a UK company adopting a US holding company structure upon its US IPO also may render it no longer eligible for FTSE indexation.

Non-US companies rarely benefit from the better liquidity in the United States

Commonly used analysis suggests that US-listed companies experience higher liquidity than their UK-listed counterparts. For example, according to Bloomberg data, in 2022, total volume traded for the S&P 500 and the Nasdaq 100 Index amounted to over £50 trillion and £20 trillion, respectively, whereas seemingly comparable statistics for each of the FTSE 350, FTSE 250 and FTSE 100 amounted to, in each case, under £5 trillion.

However, such comparisons do not always paint the full picture; in particular, they do not take into account the differences in issuer size, market size or volume of shares actually outstanding. The LSE recently analysed liquidity using an alternative metric called the average daily free-float adjusted turnover ratio, which is, essentially, the percentage of shares traded daily (on average) out of only shares which are outstanding and available to be traded (as determined by LSE analysis of LSEG Workspace’s Market Share Reporter and Bloomberg FRAG data). This ratio in 2022 by index was 0.96%, 0.86%, 0.84% and 0.62%, for each of the FTSE 100, FTSE 350, FTSE All Share and FTSE 250, respectively, compared to 0.76% and 0.74% for each of the S&P 500 and Nasdaq 100 Index, respectively, suggesting that LSE liquidity statistics were broadly on par with that of the NYSE and Nasdaq, when adjusting for market size (which is, in part, a function of issuer size) and free float volumes.

Valuations are not always better in the United States

The perception of higher valuations sometimes drives companies looking to IPO to the US. However, this perception is not necessarily supported by the data, particularly when comparing like for like. According to data from the LSE, when considering valuation in the context of metrics that take into account a company’s growth and profitability, listing venue is less determinative of such valuation.

One such metric is the so-called ‘Rule of 40’, common in the tech sector to analyse the future growth and profitability prospects of a company. The LSE recently compiled a comparison of UK companies with similar ‘Rule of 40’ ratings and market capitalisations and found that valuation did not correlate with listing venue. This suggests that valuation is driven by fundamentals, rather than by listing venue.

Listing and ongoing compliance can be more onerous in the United States, and costs tend to be higher

Historically, the listing process – including registration with the US Securities and Exchange Commission (SEC) – has been thought to be more onerous than the UK process. According to LSE analysis of data from LSEG Workspace, FactSet and Cornerstone Research, listing costs overall are higher for US IPOs, with underwriting fees between averaging between 6 and 9% in the US, compared to between 2 and 4% in the UK, both as of May 2023. Directors’ and officers’ (D&O) insurance costs are reportedly approximately 10 to 15 times more expensive for a US-listed company than for a UK-listed company, largely due to the litigiousness of the US compared to the UK. In 2021 alone, over 200 new securities class action lawsuits were filed in the US, compared to only five since 2008 in the UK.

Further, ongoing compliance in the US can be more onerous and costly than in the UK. This is largely due to audit costs as a result of additional financial disclosure, as well as public and investor relations costs, and periodic reporting and other legal and compliance costs – including exchange annual fees. In the US, Sarbanes-Oxley introduces a risk of personal criminal liability for a company’s CEO and CFO, who must sign off on certain disclosures; no comparable criminal liability exists in the UK regime.

IPO and related market reforms expected to materialise in 2024 in the UK have the potential to make the LSE even more attractive to companies.

Companies can still access US capital markets without a US listing

Companies can, and regularly do, access the US capital markets from outside the US without going through the US registration process with the SEC and being subject to the SEC’s ongoing compliance requirements. This is done through exempt offerings to certain categories of sophisticated investors, such as ‘qualified institutional buyers’. In choosing an exempt offering, companies can avoid the onerous registration and compliance requirements of a full US listing, while still accessing major US investors and US capital.

Often, companies listing on the LSE would be accessing the same pool of sophisticated investors through an exempt offering as they would through a fully registered offering. Commercially, exempt US demand on UK IPOs in 2021 was exceptionally strong, particularly on IPOs that year.

Co-written by Roberta Markovina and Yuji Huang of Pinsent Masons.