Why is the London Stock Exchange muscling in on the private equity world?

Receive free Equities updates

We’ll send you a myFT Daily Digest email rounding up the latest Equities news every morning.

Autumn has arrived in London in much the same gloomy mood as spring departed. 

Abcam, a leading UK biotech that had already left for Nasdaq, agreed to be bought by US industrial consolidator Danaher. Arm’s initial public offering preparations stateside are a sore reminder that the formerly UK-listed tech darling shunned British equity markets this time around. Private equity’s interest in London-listed bargains remains, with France’s Archimed agreeing to buy Aim-listed software group Instem. There is little sign of life in the IPO market.

There are countless groups, reports and proposals bemoaning this overwhelming sense of shrinkage.

Amid the reforms trying to up the attractiveness of London as a listing venue, there is one plan that the stock exchange at least sees as “truly game-changing”. It wants to muscle in on private equity with an “intermittent trading venue” (unhelpfully abbreviated as ITV), a platform for founders, investors and employees in private companies to sell their shares in the absence of a market listing. 

It makes sense that the LSE wants a piece of this action. The explosion of private capital means companies are staying private for much longer. The perception of an inhospitable IPO market wasn’t entirely fair but, regardless, it is now definitely closed. Research by Beauhurst for Charles Stanley has found a record number of UK equity-backed businesses, nearly 20,000, which haven’t yet managed a sale or float. But founders, and employees wooed with start-up stock, want ways to take money off the table in the meantime.

This is a genuine need — one that a growing number of businesses want to address. Nasdaq Private Market has helped US private companies with this problem since 2013. Forge Global, a US group offering a similar service, is launching in Europe in partnership with Deutsche Börse. Crowdfunding platforms such as Crowdcube and Seedrs operate noticeboards, rather than fully fledged platforms, enabling secondary sales. Broker Winterflood Securities, with private company platform JP Jenkins, also wants to help investors take stakes in unlisted companies. 

The LSE — which describes its proposal as the “world’s first regulated crossover market” — envisages 12 auctions a year. Details are being thrashed out. But the idea currently is that private companies would share information with potential investors via a closed portal. Companies would have control over what type of investors could participate, as well as setting pricing and volume limits. The venue would use the LSE’s existing auction infrastructure — though it wouldn’t raise new primary funds. 

It’s not clear how much of a boost this might be for the UK’s 34,000 “scale-up” community of fast-growing companies that have moved beyond the start up stage. It seems most likely to appeal to the largest private companies, who are approaching listing and are prepared to work with advisers and take on the, potentially quite substantial, disclosure and vetting requirements. Those are most likely to interest the institutional investors that the LSE naturally attracts. But the scale-up market needs a big, broad solution for secondary liquidity to achieve the desired recycling of money into new investments. 

What is in this for the LSE? The exchange certainly needs to innovate — and this project was blessed, or appropriated, by the chancellor in his Mansion House speech. But there are some tensions here. At a time when there is focus on getting more retail involvement into markets, this would be for institutional and sophisticated buyers only. When there is huge effort going into making London’s public market more attractive, it is essentially a tool to help companies stay comfortably private for even longer.

One attraction may simply be to delay the moment of reckoning when the UK’s biggest start-ups choose their listing location. One theory is that the venue could allow private companies to test the waters in terms of the disclosures and processes that come with listing, while establishing a relationship for the stock exchange with business it would like to win. 

Does that change any game for London, the stock exchange or the scale-up world? Possibly not. But faced with a long, cold winter, getting a foothold in private capital and trying to build bridges to the public markets is worth a try.

helen.thomas@ft.com