London: Apple crumble

The figures say it all. In the past four years the total raised in IPOs on the New York Stock Exchange has increased by 167 per cent.

Over the same period there has been a staggering 998 per cent increase in funds raised on the main list of the London Stock Exchange (LSE), from $3,568.2bn (£1,817.77bn) in 2003 to $39,161.6bn (£19,950.37bn) last year.

And while US technology market Nasdaq has rebounded over the past four years following the dotcom dearth, growing by 184 per cent from $6,149.7bn (£3,132.88bn) to $17,491bn (£8,910.56bn), it cannot touch AIM. The UK’s junior list has mushroomed by 628 per cent over the past four years, from $1,652.4bn (£841.79bn) to $12,030.6bn (£6,128.83bn).

No wonder New York City Mayor Michael Bloomberg is worried. In January Bloomberg received a copy of the report he and New York senator Charles Schumer commissioned from management consultancy McKinsey & Company. For New Yorkers the findings made disturbing reading.

The report, ‘Sustaining New York’s and the US’s Global Financial Services Leadership’, claims that, over the next five years, New York risks losing around 7 per cent of its financial services market share, a figure that equates to up to $30bn (£15.28bn) and in excess of 60,000 jobs.

It argues that New York will eventually be left in the shade of other financial centres, notably London, but also others including Dubai, Frankfurt and Shanghai.

The reason? McKinsey’s finger points directly at the stringent securities regulatory regime, particularly the Sarbanes-Oxley Act, and the high risk of litigation in the US – factors that over the past few years have had a significant effect on the levels of listings in New York.

As the figures above illustrate, that downturn is already well underway.

Why London?
The Lawyer’s most recent podcast, published last Monday (26 February), focuses on New York’s struggle to compete against other world financial centres. The US lawyers interviewed are in no doubt that McKinsey’s findings are accurate.

“The statistics are undeniable,” says Freshfields Bruckhaus Deringer chief executive Ted Burke. “Certainly London’s share of various capital formation products has been increasing significantly over the last couple of years.”

Most capital markets lawyers are also in step with the findings of the McKinsey report.

“I fully agree, I’ve been saying it publicly for years,” says Camille Abousleiman, head of capital markets at the London office of LeBoeuf Lamb Greene & MacRae. “You must be out of your mind to list in New York.”

Abousleiman points to two reasons. One is Sarbanes-Oxley, a factor several UK magic circle partners say is a godsend. “We’re marketing to clients on that basis, banging that home,” says Abousleiman.

The second is “the human element”, as Abousleiman puts it. “If you’re the CFO [chief financial officer] of a company, why take the risk of criminal proceedings and personal liability if something’s wrong with the accounts?” he adds.

Another reason, though, is liquidity. In the past New York was streets ahead, but London is more or less on equal terms now. “For me it’s obvious, a no-brainer,” says Abousleiman.

There are other reasons for London’s rise. The LSE has become a lot more flexible and commercial in recent years, a fact highlighted by the recent secondary listing of hedge fund feeder BH Macro by Brevan Howard Asset Management.

This was the first hedge fund listed on the main London market. Brevan Howard, advised by Simmons & Simmons, took advantage of the recent stock exchange listing rule changes, which allowed it to go for a secondary, rather than a primary, listing (with attendant lighter regulatory obligations under Chapter 14 as opposed to Chapter 15).

But the key factor in London’s emergence as a global capital markets powerhouse is that it is prepared to float companies from all around the world, in particular China, India and Russia. For example, there are now six Indian real estate funds listed on AIM.

London’s eagerness to embrace all and sundry drew a withering putdown from one US blogger recently (mydailyfatwa.blogspot.com), who said: “Given the corporate governance problems now plaguing Russian companies, bragging about how your exchange is attracting the lion’s share of these questionable listings is a bit like a West Virginia trailer park bragging about how it is beating the pants off Martha’s Vineyard in the fast-growing mobile home market.”

Indeed, the rule changes that have paved the way for deals such as Brevan Howard’s have also drawn considerable criticism. Last month the Financial Services Consumer Panel (FSCP) made its opposition to the ‘light touch’ approach clear to the Financial Services Authority (FSA) when it claimed that the proposals were made purely “for the sake of attracting non-UK-based companies to list in the UK” and that it would attract companies “at the expense of investor protection”.

Just last Tuesday (27 February), the front page of the Financial Times carried a report that John McFall, chairman of the Commons’ Treasury Committee, had written to FSA chief executive John Tiner warning that exempting foreign groups from more rigorous standards of regulation would lead to “vital regulatory protections being abandoned”.

London-based Skadden Arps Slate Meagher & Flom tax partner James Anderson admits that the increasing flexibility of the LSE could be a double-edged sword.

“Yes, you don’t want to attract ungovernable companies, but they’ll go where the deepest and most receptive capital markets are,” he argues. “The point about capital markets is that they’re often self-regulating. In the last few months there have been certain Russian companies pulling or repricing London flotations because the market is less receptive than it’s been in recent years. The market knows how much risk it can tolerate.”

The effect on the legal market
The rude health of London’s capital markets has sparked a boom in capital markets lawyers and a rapid growth of US firms based in the City.

Exclusive research by The Lawyer (26 February) reveals that nine of the top 10 highest-grossing US firms in London would, based on current figures, all make it into last year’s UK top 50 (Weil Gotshal & Manges‘ London office in ninth position with £53.26m comfortably pips Ince & Co, last year’s 50th-placed firm).

It is a phenomenal performance, which highlights both the maturity of US firms in London and their success in building solid domestic practices. But equally it suggests that work levels in the core capital markets practices that many of these firms maintain have grown locally, to the extent that they can support significant teams of lawyers.

In other words, the astonishingly rapid growth of London as a key global financial centre is turning it into the world’s number one destination for capital markets lawyers.

“US firms’ initial capital markets’ offering in London and Europe was advising on and securing New York listings for European clients,” says Skadden’s Anderson. “In the last few years you’ve seen the pendulum swing the other way, with US clients coming to us for European listings. There’s definitely been a downtick in New York listings and Securities and Exchange Commission filings and an uptick in London and European floats.”

There is a note of caution among the bullishness from Clifford Chance London finance partner Tim Plews, who points out that the temptation to focus on major IPOs risks ignoring a whole range of structured finance products, which New York continues to handle extremely efficiently. “There’s a lot of breast-beating stateside on this issue,” says Plews. “But it’s no good London thinking it’s won some great victory, because it hasn’t.”

But according to Burke at Freshfields, it is impossible to ignore the fact that London itself has become a tremendous talent magnet.

“You see talent coming to London from all across Western Europe, from Asia, from the Middle East, from Russia,” says Burke. “It’s truly an international cosmopolitan city. It is, to some degree, a more attractive place for companies coming from certain regions to list or raise capital than the US. All of those things mean that London’s rise is relatively inexorable and I don’t think reforming Sarbanes-Oxley will be enough to stem the flow of capital-raising to London and away from New York.”

Fighting back
The reform of US regulations such as Sarbanes-Oxley features prominently in the McKinsey report’s recommendations. Other recommendations include easing immigration restrictions faced by overseas professionals, implementing the Basel II Capital Accord and modernising financial services charters and holding company structures.

According to Anderson, “everyone cites Sarbanes-Oxley”, and he agrees that it is a factor. “It’s a powerful reason to avoid getting yourself entangled with the regulations,” he admits.

But in his opinion there is another, and far simpler, reason why London is catching New York as the premier global financial centre. “It’s where the money is,” he says.