Weekly Reads
Weekly Reads - December 18, 2023

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The U.K. stock market is in danger of losing some of its important constituents to the U.S. as investors push U.K. companies to relist in the U.S.to maximize their value.

2023 has not been kind to the U.K. stock market with the FTSE100 underperforming and growing activist pressure on U.K. companies to maximize value. With U.K. stocks languishing while U.S. stocks outperform, activists are circling widely known U.K. companies pushing them to relist their shares in U.S. markets. Relisting is seen as a simple way to create value for European companies since U.S. listed stocks typically trade at higher valuation multiples than European peers. ARM and CRH are great examples of U.K. companies that spurned their home stock exchange for the U.S. exchange and saw strong short-term results. Other companies are planning to follow suit with travel company Tui, the U.K.’s biggest package holiday operator, potentially leaving the FTSE 100 for a Frankfurt listing. Sensing blood in the water indexes like the Nasdaq have been very aggressive in poaching U.K. companies meeting with executives and convincing them that a relisting could be a catalyst toward valuation creation. This flight of companies is creating a negative feedback loop in which liquidity is leaving U.K. markets, keeping valuations depressed and disincentivizing future IPOs. For the first time since 1995, the London Stock Exchange has raised less than $1 billion through IPOs, a shocking statistic when you consider that U.K.-headquartered ARM raised $55 billion in the U.S. If the U.K. does not quickly react to this trend the U.K. could lose a key part of their financial ecosystem permanently crippling their financial markets.

The private equity markets are dealing with a capital crisis as high interest rates and economic uncertainty have institutional investors pulling back on their capital allocations to the asset class.   

Private equity firms are scrambling for capital as institutional investors pull back capital for private equity investment. This capital crisis has firms looking at European and Middle Eastern placement agents in order to raise capital from non-institutional sources like private wealth clients. In the era of low-interest rates and cheap capital many firms had no use for placement agents to help with fundraising as capital was plentiful. Now private equity is struggling to raise cash and placement agents are regaining their popularity as firms look at alternative geographies and markets for fundraising. These placement agents are acting as middlemen for private equity firms offering expertise in specific geographies or markets.  Many of these agents have local relationships with small pension funds and family offices that were not on the radar for these private equity firms historically with the primary focus on large institutional investors with deep pockets. As of the end of September, the aggregate capital raised by private equity totaled $900 billion, a pace that indicates that 2023 will end below 2022’s $1.4 trillion in capital raised. With many firms starved of capital the industry is getting more creative, accepting lower initial investment amounts, and knocking on doors that were previously ignored. While these fundraising ploys may keep the private equity market buoyant in the short-term if economic conditions don’t improve, we could see many firms face liquidity crunches that force them to exit their market.

The new antitrust guidelines being finalized will vastly change the M&A landscape blocking deals that would have been approved in the past and disincentivizing companies from pursuing landscape alternating deals.

The Biden Administration is finalizing 11 new guidelines for antitrust enforcement overhauling antitrust law in hopes of cracking down on M&A and thwarting industry consolidation. These guidelines are largely similar to a proposal issued in July but include a new guideline focused on preventing vertical deals in which companies acquire companies in their supply chain. These new guidelines are the first widespread changes to antitrust law in ages as the Biden Administration doubles down on its efforts to block more mergers. This proposal is being finalized after two landmark wins with Adobe scrapping their acquisition of Figma and Illumina’s decision to divest their cancer unit Grail. These new guidelines aim to help agencies win more cases in court after years of failed ligation by antitrust agencies. These guidelines will undoubtedly increase the regulatory power of antitrust agencies allowing them to wield more control over the destiny of important industry mergers. The question remains whether a harder stance on M&A will actually help level the playing field for small businesses and lower the cost for customers or rather create economic stagnation with increased government interferences negatively impacting capital markets.