Capital Markets Corporate

April 9, 2021

Deliverue – Why London’s IPO Reforms Should Still Go Ahead

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After a dearth of listings for nearly two years, London IPOs bounced back in extraordinary fashion in the first quarter of 2021. In the first three months of the year, there were 25 IPOs in London, raising an aggregate £7.2bn.

But London’s success in the early months of 2021 has been overshadowed by numerous headlines about Deliveroo – which officially enjoyed one of the worst starts to public life in decades when its share price plummeted on its first day of dealings. At the time of writing, Deliveroo’s shares remain 25% below the listing price.

The inquest into the failure of Deliveroo’s public debut is well underway. Fundamentally, it is unsurprising that investors were concerned about a multi-billion pound valuation for a food delivery business which made a £224m loss in the previous financial year.

Investors were also concerned about Deliveroo’s use of self-employed riders. Some of the City’s largest asset managers publicly announced that they would not invest in Deliveroo, citing reservations over the governance of the company and the way it categorises and treats its employees.

Furthermore, the company’s use of gig economy workers is under threat from regulation. The Supreme Court recently ruled against Uber, with the ride hailing app now classifying its drivers as employees entitled to minimum wage and holiday benefits. A similar ruling against Deliveroo would increase its cost base significantly and could destroy its business model entirely.

Then there is the monopoly of successful technology investing. It requires investors to back a lot of companies on the assumption many will turn out to be lame ducks, but the winners will be potentially world beating. Let’s not forget either that technology companies on both sides of the Atlantic have had rough public debuts. You need only look so far as two of the lauded FANG stocks – Facebook and Google – to realise that a bad debut is not necessarily an indication of a bad stock.

Without a doubt though, the issue that has taken up the most column inches as the key contributor to the failed Deliveroo float is its dual-class structure, which allows CEO Will Shu to retain 57% of voting rights and protection from any takeovers for the next three years. City commentators believe that failure of the Deliveroo IPO is all the evidence we need to scrap Lord Hill’s proposed reforms to London’s IPO market, including the use of dual-class structures on premium listings.

In my opinion, this would be a grave mistake.

For too long, London has been outmuscled by New York as the global centre for growth capital. In particular, NASDAQ has served as the prime destination for technology companies seeking a public listing in the last two decades.

The reforms recommended in Lord Hill’s report are long overdue. But there is no doubt that to many in the City, the two central recommendations of the report – dual-class structures and SPACs – are contentious, especially when you consider London’s reputation as the global leader of corporate governance standards.

Leaving SPACs aside, Lord Hill’s recommendation to introduce dual-class structures includes safeguards such as a five-year limit to mitigate risk. This is wise and strikes the correct balance between luring more entrepreneurs to consider an IPO and retain control over their company, while maintaining London’s high corporate governance standards.

Put simply, if the IPO market does not reform, then New York will continue to gobble up dual-class floats and not only eat London’s lunch, but its breakfast and dinner too. For centuries, the UK has been a global leader in innovation and technology. And now, as we enter the third decade of the 21st century, we must foster an environment that encourages new investment into exciting growth sectors to extend our track record as a global centre for innovation.

To throw the baby out with the bathwater, and halt much needed reforms to London’s IPO market because of one bad float, would be a mistake, and one that London would rue for years to come.

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