Can the Latest Trading Platform from London Stock Exchange Enhance Funding for Emerging Startups?

The London Stock Exchange Group is working on a new trading platform for private companies, aiming to address the recent shortage of Initial Public Offerings (IPOs) in the UK. This platform is designed to give growing companies more financial resources and to strengthen the UK's capital markets. The Finance Minister, Jeremy Hunt, views this as part of a broader effort to promote the growth of domestic companies and attract international ones to the UK.

In a speech in July, Hunt outlined the plan for this new trading venue, expected to be operational by the end of 2024. The venue will serve as a link between private and public markets, allowing the trading of existing shares but not the issuance of new capital. It's primarily intended for professional investors, not the general public, and is still undergoing consultation and regulatory review.

Darko Hajdukovic, who leads the development of new markets at the exchange, explained that many UK businesses that have moved beyond the start-up phase struggle with limited access to funds or high funding costs. This new platform aims to help these companies by providing a way to convert their shares into cash while they remain private. It also opens up opportunities for a broader range of investors to invest in these companies.

Thiha Tun, a partner at Dechert law firm, mentioned that for the past decade, private equity and venture capital have been heavily investing in startups, leaving those who typically invest in public markets with fewer opportunities. This new platform could shift that balance.

Similar in concept to the Nasdaq Private Market launched in 2013, the London exchange's program is expected to offer monthly auctions. Companies can choose whether to participate, but it won't suit every pre-IPO company; it's more suitable for those with a diverse shareholder base.

This initiative represents a change in strategy following the UK Treasury's wholesale markets review. Madeleine Ingram from Calculus Capital, an investment firm, pointed out the need to continue supporting smaller, innovative businesses crucial for the UK's future growth.

A key aspect of this new platform is finding the right balance in disclosure requirements. Companies won't need to produce a detailed prospectus, but the level of information needed to assure investors is still being determined. Hajdukovic suggests that companies might need to provide information to eligible investors a few days before any auction they participate in, offering benefits like certainty of execution and easier price discovery.

However, many details are still undecided, including how to handle tax rules related to employee ownership schemes when startup employees or management sell shares.

Despite the low number of IPOs in the UK compared to the US, Hajdukovic emphasizes that the new platform is not just about creating an IPO pipeline but addressing a real market need for companies to access growth capital. He hopes, though, that companies using this platform might eventually go public.