UK tech darlings shun London for New York; “There are very few exit opportunities in Europe.”

July 5, 2013 2:28 pm

UK tech darlings shun London for New York

By Henry Mance and Arash Massoudi

When six entrepreneurs tried to raise money for an online games business in London a decade ago, many investors simply put the phone down. Now it’s the entrepreneurs’ turn to hang up. Their company, known as King and the owner of Candy Crush Saga, the most popular game on Facebook, is planning an initial public offering in New York, according to people familiar with the situation. It heads a list of successful UK tech companies which are turning their backs on a London flotation, and instead crossing the Atlantic in search of a billion-dollar valuation. Bernard Liautaud, a partner at Balderton Capital, which has invested in companies including Wonga, says: “There are very few exit opportunities in Europe.”King, which offers cash prizes for some games, is understood to have appointed JPMorgan Chase, Credit Suisse and Bank of America to run its offering, expected as soon as this year.

Also looking to float in the US is Markit, a London-based data provider whose economic surveys are keenly watched by traders. The company was valued at $5bn at its last round of investment in May.

King and Markit declined to comment.

The departure of high-growth British companies – dubbed the “tech-odus” – is not a new phenomenon.

But the latest wave is embarrassing, as it comes just months after the London Stock Exchange changed its rules specifically to attract technology start-ups.

High-growth companies are now able to sell initial stakes of 10 per cent, compared with the usual requirement of 25 per cent, leading the chancellor George Osborne to say the UK was “rolling out the red carpet to the world’s fastest growing companies”.

While the listing changes have been broadly welcomed, entrepreneurs say that London still lacks the tech-savvy investors to attract the next Facebook or Workday.

“There’s an aspect to an IPO as perhaps the most important marketing event in a company’s life,” says John Newton, founder of Alfresco, a software company based in Maidenhead, which is planning to list on Nasdaq or the New York Stock Exchange in the coming years.

“I know where the investors are. The investors are in the US. The analysts are in the US. The market makers are in the US. It’s a no-brainer.”

The number of tech analysts in London has shrunk in recent years, following the decline or acquisition of European companies such as Nokia and Autonomy.

“Companies like to list where they think investors have the best grasp of what their business is and they feel the US tech investor base is specialised whereas UK investors are more generalist,” says one New York banker familiar with the deals.

The result can be a snowball effect.

“There’s a higher probability that we would list in the US, because so many of the companies that look like us are listed there,” said Kris Hagerman, chief executive of Sophos, the IT security company, which is based in Oxfordshire.

Sophos tried to list in London in 2007 and 2009, and is now building up to a third attempt, although it says it hasn’t decided on timing or location.

The US has seen a recovery in investment banking this year, while European markets have remained weak.

I know where the investors are. The investors are in the US. The analysts are in the US. The market makers are in the US. It’s a no-brainer

– John Newton, founder of Alfresco

Defenders of London’s stock exchange argue that King, Markit and Sophos are global businesses, which now get only a slice of their revenues from the UK.

They also say the change in the listing rules will have a gradual impact. “We’re not expecting that one lever is pulled and a flood of companies will come through the door,” says Marcus Stuttard, head of London’s Alternative Investment Market, which has had small technology companies such as Sheffield’s WANdisco float successfully in recent months.

Both London’s critics and supporters agree that once a company lists in the US its headquarters are likely to switch across the Atlantic too. “It’s very hard to be quoted in the US without the management going there,” said Mr Liautaud.

Index Ventures, an early-stage fund that is one of the biggest proponents of London technology listings, says it has 37 European companies in its portfolio that have combined revenues of £3bn and are “IPO-capable”.

Others that are candidates for a London listing include clothes company The Hut, delivery service Just-Eat, and games company Mind Candy.

However, several venture capitalists said they were cautious about the prospect of any major tech IPO in London this year.

“It’s like a chicken and egg situation,” says Robin Klein, a partner at Index. “We need to find one or two that are ready to jump.”

London’s search for a billion-dollar technology IPO continues.

 

Wonga: better off private?

 

Perhaps not even Wonga, the London-headquartered online lender that had pre-tax profits of £62m in 2011, is a natural fit for the City’s stock market.

“The last thing fund managers want is a company that attracts large amounts of publicity,” said Andy Brough, a mid-cap manager at Schroders.

“If Wonga floated there wouldn’t be a day without images of being thrown out on the street because they hadn’t paid their loans.”

Payday lenders are already facing curbs on advertising, and the prospect of stiffer regulation from the Financial Conduct Authority.

One venture capitalist said that, rather than expose itself to the increased scrutiny associated with a public listing, Wonga should “shut up” and look for a private equity buyer.

However, Wonga’s backers – who are seeking to refocus the business away from payday lending to other forms of credit – argue that it is already in the public eye.

“The company has a very active dialogue with the regulators,” said Bernard Liautaud, of Balderton Capital.

Borrowing £100 from Wonga for two weeks incurs £20 in interest and fees. “The problem is that it gets abused: it gets used by people who finance their life with it,” said Mr Liautaud.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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