UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
formance, competitive landscape and market conditions – play a role in accelerating, delay - ing or even impeding a company’s exit and IPO timeline. IPO exits in the UK peaked in the third quarter of 2021, with both the number and val - ue of IPOs of high-growth companies hitting a record level, representing a combined market capitalisation of GBP20.6 billion. IPO exits globally have recently experienced a protracted slowdown, driven by high interest rates, rising inflation and the impact of these macroeconomic factors on valuations, as well as aftermarket performance difficulties suffered by recent IPO candidates. This challenge to the global public equity markets has led to an increased focus on regulatory reform, including in the UK and the European Union, to boost the attractiveness of the equity capital markets; it has also led to increased competition from New York as a listing venue. In response to this, the FCA is implementing a radical restructuring of the UK Listing Rules to attract more companies to London. The Listing Rules reforms have been generally well received by the market. 6.3 Pre-IPO Liquidity PISCES There is a tangible market need for secondary market trading prior to an IPO to facilitate liquid - ity. Faced with the slowdown in IPO activity due to the global economic climate, secondary trans - actions provide a mechanism for early-stage investors, founders and employees to reclaim all or part of their investments whilst allowing companies to remain private. Investors are more likely to invest, and employees to be retained, if the opportunity exists to sell equity before an IPO. Secondary market trading also means that new investors can tap into the potential of more mature and experienced companies.
It is a common strategy for founders to sell down a portion of their shareholding to incom - ing investors in a new financing round, in order to receive some liquidity for all their hard work to date. Founders may offer a discount to the investor, and this can help the investor achieve a blended rate for their investment acquisition cost while offering an opportunity for founders to secure their financial future, given that they may have worked on very modest salaries for some time. This is generally seen as a positive experience for both parties, and is very common on later-stage (Series B) transactions. The key challenges presented by secondary market trading include: • the lack of transparency and readily available information about private companies com - pared to public companies; • regulatory hurdles and compliance with secu - rities law; and • conflict between companies and sharehold - ers, with the former wanting to maintain control of their equity trading via structured liquidity events such as tender offers and auctions, and shareholders preferring stream - lined access to the isolated liquidity event of a direct secondary sale. To address these issues, the FCA will implement and operate a new form of regulated trading platform, allowing for the intermittent trading of shares in unlisted companies in the UK, called the Private Intermittent Securities and Capital Exchange System, or “PISCES” . Following a consultation in March 2024, HM Treasury con - firmed it will proceed with the proposal and leg - islate for the platform’s establishment in a regu - latory “sandbox” .
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