‘A very problematic market’: As Arm shuns London, tech investors question UK as an IPO destination

The U.K. may be a great place to build a tech company — but when it comes to taking the crucial step of floating your business, the picture isn’t so rosy.

That’s the lesson several high-growth tech businesses have come to learn in London.

When Deliveroo went public in 2021, at the height of a pandemic-driven boom in food delivery, the company’s stock quickly tanked 30%.

Investors largely blamed the legally uncertain nature of Deliveroo’s business — the company relies on couriers on gig contracts to deliver meals and groceries to customers. That has been the subject of concern as these workers look to gain recognition as staffers with a minimum wage and other benefits.

But to many tech investors, there was another, much more systemic, reason at play — and it’s been cited as a factor behind chip design giant Arm’s decision to shun a listing in the U.K. in favor of a market debut in the U.S.

The institutional investors that dominate the London market lack a good understanding of tech, according to several venture capitalists.

“It’s not the exchange, it’s the people who trade on the exchange,” Hussein Kanji, founding partner at London VC firm Hoxton Ventures, told CNBC. “I think they’re looking for dividend-yielding stocks, not looking for high-growth stocks.”

“Two years ago, you could have said, you know what, it might be different, or just take a chance. Now a bunch of people have taken a chance and the answers have come back. It’s not the right decision.”

Numerous tech firms listed on the London Stock Exchange in 2021, in moves that buoyed investor hopes for more major tech names to start appearing in the blue-chip FTSE 100 benchmark. 

However, firms that have taken this route have seen their shares punished as a result. Since Deliveroo’s March 2021 IPO, the firm’s stock has plummeted dramatically, slumping over 70% from the £3.90 it priced its shares at.

Wise, the U.K. money transfer business, has fallen more than 40% since its 2021 direct listing. 

There have been some outliers, such as cybersecurity firm Darktrace, whose stock has climbed nearly 16% from its listing price.

However, the broad consensus is that London is failing to attract some of the massive tech companies that have become household names on major U.S. stock indexes like the Nasdaq — and with Arm opting to make its debut in the U.S. rather than the U.K., some fear that this trend may continue.

“It’s a known fact that London is a very problematic market,” Harry Nelis, general partner at VC firm Accel, told CNBC.

“London is creating, and the U.K. is creating, globally important businesses — Arm is a globally important business. The issue is that the London capital market is not efficient, essentially.”

A London Stock Exchange spokesperson told CNBC: “Arm is a great British company and a world leader in their field which we continue to believe can be very well served by the U.K. capital markets.”

“The announcement demonstrates the need for the U.K. to make rapid progress in its regulatory and market reform agenda, including addressing the amount of risk capital available to drive growth. We are working with regulators, Government and wider market participants to ensure U.K. capital markets provide the best possible funding environment for U.K. and global companies.”

Brexit, too, has clouded the outlook for tech listings.

Funds raised by companies listing in London plunged by more than 90% in 2022, according to research from KPMG, with the market cooling due to slowing economic growth, rising interest rates, and wariness around the performance of British firms.

Previously-published figures for the first nine months of 2022 place the fall in European funds raised at between 76% and 80% annually, indicating a less severe decline than the U.K.’s 93%.

Hermann Hauser, who was instrumental in the development of the first Arm processor, blamed the firm’s decision to list in the U.S. rather than U.K. on Brexit “idiocy.”

“The fact is that New York of course is a much deeper market than London, partially because of the Brexit idiocy the image of London has suffered a lot in the international community,” he told the BBC.

Cambridge-headquartered Arm is often referred to as the “crown jewel” of U.K. tech. Its chip architectures are used in 95% of the world’s smartphones.

SoftBank, which acquired Arm for $32 billion in 2016, is now looking to float the company in New York after failing to sell it to U.S. chip-making giant Nvidia for $40 billion.

Despite three British prime ministers lobbying for it to list in London, Arm has opted to pursue a U.S. stock market listing. Last week it registered confidentially for a U.S. stock market listing. 

Developing research and development for cutting-edge chips is a costly endeavor, and Japan’s SoftBank is hoping to recoup its seismic investment in Arm through the listing.

Arm is expecting to fetch roughly $8 billion in proceeds and a valuation of between $30 billion and $70 billion, Reuters reported, citing people familiar with the matter.

Arm has said it would like to eventually pursue a secondary listing, where it lists its shares in the U.K. following a U.S. listing. 

Still, regulators have sought to attract tech companies to the U.K. market. 

In December, the government rolled out a set of reforms aimed at enticing high-growth tech firms. Measures included allowing firms to issue dual-class shares — which are attractive to founders as they grant them more control over their business — on the main market.

Last week, the Financial Conduct Authority also proposed simplifying the standard and premium equity listing segments as one single category for shares in commercial companies.

This would remove eligibility requirements that can deter early-stage firms, allow for more dual-class share structures, and remove mandatory shareholder votes on acquisitions, the regulator said.

Despite the negative implications of Arm’s decision, investors largely remain upbeat about London’s prospects as a global tech hub.

“Fortunately for us, it doesn’t mean that the UK is not attractive to investors,” Nelis told CNBC. “It just means that where you IPO is just a financing event. It’s just a place, a venue where you get more money to grow.”