UK: An Introduction to Capital Markets: Equity

An Introduction to the Current Equity Capital Markets Landscape in the UK

London has long been considered as a leading choice for companies across various sectors looking to raise capital. It has historically boasted a strong legal and regulatory framework ensuring competitiveness as well as compliance with internationally recognised standards. This has helped cement its position as a strong competitor to New York. Owing to its geographical location, it uniquely provides ease of access to investors in the US, Europe, the Middle East and Africa.

Companies raising capital in the UK are regularly supported by an array of investment banks with a significant international presence. Their expansive investor base and placing power is another aspect that makes London attractive to issuers. The majority of larger equity capital markets transactions in the UK are structured as Rule 144A offerings targeted at qualified institutional buyers (QIBs) in the US, giving companies based in EMEA access to US investors.

Following the COVID-19 pandemic, UK equity capital markets have seen activity dampened by a number of factors including political instability; wars in Europe and the Middle East; higher interest rates; and a greater inflationary environment. However, this trend seems to be reversing, assisted by the ongoing reform of the UK listing regime.

Overview of financial market infrastructure

The London Stock Exchange (LSE) has two markets: the Main Market and AIM. The Main Market is the LSE’s flagship platform. It is regulated by the Financial Conduct Authority (FCA) and issuers listed on the Main Market are subject to the highest standards of disclosure and regulation in the market.

AIM is an exchange-regulated market intended for smaller and medium-sized growth companies.

The Main Market has a primary listing category for equity shares of commercial companies which has a minimum market capitalisation requirement of GBP30 million. Other listing categories exist for shares issued by shell companies as well as closed-ended and open-ended investment companies. Depositary receipts also have their own separate listing category. In addition, an international secondary listing category exists for non-UK incorporated companies with primary listings elsewhere.

There is no minimum market capitalisation requirement on AIM.

The listing requirements for companies intending to list on the Main Market are set out in the UK Listing Rules (UKLR) published by the FCA. The UK listing regime has been undergoing reforms and the new UKLR came into effect on 29 July 2024. Prospectus requirements applicable in the UK continue to be governed by the onshored version of the EU Prospectus Regulation, which to a large extent remains aligned with the prospectus requirements in the EU. The FCA is currently consulting on reforms to the prospectus regime in the UK, with changes expected during 2025.

For Main Market transactions where a prospectus is required to be published by a company, various drafts of the prospectus are shared with the FCA which then reviews the draft and provides comments. The publication of the prospectus, and consequently the launch of a transaction, remains subject to final approval by the FCA.

Certain Main Market transactions also involve the role of an investment bank acting in a sponsor capacity. Whether or not a sponsor is required on a transaction is determined by the requirements of the UKLR. The main role of a sponsor is to assist the company in preparing for listing, co-ordinating the efforts of the other professional advisers and liaising with the FCA.

On AIM transactions, a similar role is played by an investment bank acting as a nominated adviser.

Level of equity capital markets activity, trends and developments in recent years

UK equity capital markets activity reached a peak in 2021. A total of 126 companies listed on the LSE and IPOs raised a total of GBP16.9 billion, the highest in a single year since 2007. This performance consolidated London’s position as the leading exchange in Europe, raising more equity capital than Amsterdam and Paris collectively and the highest amount of equity capital raised outside of the US and the Greater China Region.

However, from late 2021 onwards, consistent with markets generally, UK equity capital markets activity trended downwards for a number of reasons including geopolitical tensions and conflicts; a higher inflationary and interest rate environment; and political instability in the UK.

However, there are indications that this trend may be reversing and there have been a number of positive signs for the market in 2024, including the IPOs of Raspberry Pi and Applied Nutrition. Raspberry Pi raised GBP166 million with a market capitalisation of GBP542 million and saw its shares surge by 38% on the first day of trading.

Applied Nutrition raised GBP375 million and its shares opened 7% above the IPO price.

In terms of secondary offerings, the GBP7 billion rights issue launched in May 2024 by National Grid plc was the largest in the UK since 2010.

Reforming the listing regime

In the last few years, there has been a strong and continuing focus on a broad package of UK capital markets reforms by market participants across London seeking to enhance its competitiveness as a listing venue. In July 2024, the FCA published the new UKLR which constitutes the biggest overhaul of the listing regime in over three decades and largely aligns with market expectations.

Key changes include merging the Premium and Standard listing segments into a single category applicable to equity shares of commercial companies; streamlining requirements with respect to significant transactions and related party transactions; permitting dual class share structures; and removing the requirement for listed companies to have a relationship agreement with a controlling shareholder.