The London Stock Exchange’s High Growth Segment was unveiled with much pomp in April 2013, with one of its figureheads being serial angel investor and Index Ventures partner Robin Klein.
Klein told me in 2012 that the need for this kind of listing mechanism was needed because the LSE was not providing an outlet for fast-growing companies wanting to take the next step up.
At the time the High Growth Segment was launched, LSE CEO Alexander Justham stated that it would provide an “additional attractive service” and be a “launch pad for further success”.
The powers that be in the government and wider economy had become concerned that technology companies in the UK were either listing on the New York Stock Exchange or NASDAQ, or simply selling out altogether.
The eligibility criteria set out was: incorporation in an EEA state; issue of equity shares only; and being a revenue-generating business with historic revenue growth of 20 per cent (CAGR) over a three year period.
Businesses were also required to conduct a minimum free float of 10 pre cent with a value of at least £30m (majority of the £30 million must be raised at admission), and appoint a “key adviser” (who must be a UKLA approved Sponsor) to be retained at admission and for specific matters including notifiable transactions.
So far only takeaway delivery service JUST EAT and digital advertising company Matomy have used it – with JUST EAT transferring to the Premium List shortly afterwards.
To find out more, I put the question of why more hadn’t used the High Growth Segment to Marcus Stuttard, head of UK Primary Markets and head of AIM. He indicated that the first thing to realise was that, prior to launch, the decision was made to call it a “segment”, rather than a market in its own right, as it was just another choice and entry to the markets.
“We identified a relatively small segment, or niche, of businesses that were likely to be too big for AIM at time of admission but not big enough for a Premium Listing on the Main Market,” he explained to Real Business.
It is, he said, also largely a concern about the free-float requirements on the Premium List that mean 25 per cent of the company must be put up at time of listing. With many of the “niche” identified by Stuttard and the team prior to launch being fast-growth technology companies charged with venture capital cash, many of these investors are keen on continuing to retain stakes and see the future upside of a portfolio company.
The segment therefore provided some flexibility, putting the UK on an equal footing with markets such as those found in the US. A lower free float, he added, makes the transition from private to public “that bit easier”.
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The lack of interest in companies picking the High Growth Segment can be put down to a more supportive IPO market, Stuttard added. In the case of JUST EAT, he explained, the team there opted for a dual track IPO so that they could leave it till the very last moment to decided whether a Preimum Listing or High Growth Segement option was preferable. The level of support found amongst the institutional investor community meant the business was able to transfer over fairly quickly afterwards.
Information needing to be relayed to the business community, and Real Business readership, Stuttard said, centres on the fact the High Growth Segment serves as a way of removing uncertainty. “It allows these businesses to see London as a supportive IPO environment, get structures in place, and then towards the end realise if they are going to use AIM, the High Growth Segment or Premium,” he said.
“If we enter a period of more volatility then we may well see more companies using the dual track route that JUST EAT did. It takes uncertainty out of the process, so in certain times in the cycle the High Growth Segment will come into its own.”
Looking back at comments made by JUST EAT at the time of its IPO and subsequent transfer, it seems the only thing holding it back from a full float was the requirement to put up 25 per cent of the business.
It will be interesting to see if, given the upsurge in the amount of venture capital investment in British firms during the last three years, more companies will see the High Growth Segment as a way of dipping a toe in the equity markets without alarming existing investors. A stock market listing provides great credibility on the world stage, and begins to press home the need for greater corporate governance and financial management – experience crucial to becoming a truly global entity.
The strength of the equity markets right now, and evidence of strong IPOs from the likes of Zoopla, Fever-Tree Drinks and Poundland, appear to have convinced companies and executive teams that there is requisite institutional investor appetite to not have to worry about hitting the 25 per cent mark. It remains to be see whether that remains the case.
