Businesses face challenge to obtain value from investors in new London Stock Exchange High Growth Segment, says expert

Last month the London Stock Exchange outlined plans to create a new High Growth Segment to its main market (29-page / 269KB PDF) and set out proposed rules of eligibility that would govern whether and when firms could become listed on the market. The LSE will accept feedback on its proposals submitted before the market closes on Friday 8 March.

Corporate and technology law expert Andrew Hornigold of Pinsent Masons, the law firm behind Out-Law.com, said a new high growth segment to the LSE could offer European tech firms with an alternative to floating on the Nasdaq exchange, but warned entrepreneurs that investors may not be attracted to opportunities to buy shares in companies where only 10% of those firms are available.

Under the LSE's proposals only businesses incorporated in the European Economic Area demonstrating growth of at least 20% over a prior three year period would be eligible to be admitted to the high growth segment of the market. In addition those firms would need to adhere to a raft of other qualifying rules, including that they make at least 10% of their business equity available to investment by the public. The value of those publically-held securities should exceed £30 million with the majority of that figure raised at the point of admission, according to the draft rules.

"It is encouraging to see the London Stock Exchange pushing ahead with proposals for a new High-Growth segment of its Main Market," Hornigold said. "London is seen as the digital capital of Europe and Britain has proved adept at incubating hi-tech companies. Until now, however, it has not been able to offer such companies access to the London financial markets to raise capital as they grow bigger."

"This niche technology market can only be good news for the City, for Britain’s entrepreneurs and larger technology companies, which have always felt they are left with little option but to head to the Nasdaq market in the US or offer themselves for sale to private equity funds or overseas buyers once they reach a certain size," he added.

"This initiative will no doubt help to level the playing field with the US and make the UK more flexible and globally competitive, however, founders and their backers will only be required to sell 10% of the shares to new investors, and small free floats have long proved contentious in the UK," Hornigold said. "Many institutional investors and investor groups here hold the view that where only a small proportion of shares are freely traded, the shares tend to be illiquid, difficult to price and volatile, they provide less protection from a dominant shareholder, and generally result in a lack of any real control or influence for investors over the company’s direction and strategy. This view may well prove hard to shift."

"In addition, many technology entrepreneurs still feel their high-growth businesses are not fully understood or valued by the institutional investment community this side of the Atlantic, and it is certainly the case that revenue multiples in both private and public company sales in the tech sector have tended to be far higher in the US than Europe. It remains to be seen if investors in London have the appetite for just a tiny part of a large growth story, or indeed to take a risk with these companies and value them as Nasdaq investors do. Whether this move by the LSE ultimately allows the UK to produce a future household name remains open to debate," Hornigold added.