In recent weeks, we’ve seen the publication of both the Kalifa fintech review and Lord Hill’s report on the UK Listing Review.
Both of these reviews were focused on how the UK can retain its position as a global leader in financial services and put the UK on the front foot for encouraging innovative companies to come to public markets in London. It is clear that there is a strong pipeline of potential technology IPOs in the market currently (including in the insurtech space) and these reviews make a number of recommendations on how to attract them. If some or all of these recommendations are implemented, we might expect to see more insurtechs looking to access London’s equity markets as they would become more appealing to innovative companies. Our team has recently written about 2021 trends for insurtech IPOs, which you can read here.
Key recommendations
The reports make a range of recommendations, but in our view the ones that make London the most attractive for insurtechs are:
- Free float requirements - both reports have proposed reductions in the free float requirements, with the intention of enabling founders and early backers to retain more control of the company they created and to allow them to continue participating in post-IPO value growth. The Kalifa review proposes reducing the free float requirement for premium listed issuers to 10% for a limited time post-IPO, while Lord Hill’s report recommends reducing the minimum level on both listing segments to 15%. The Kalifa review describes that the Financial Services Authority (as it was) previously considered a similar proposal in 2012 but it was rejected following heavy criticism from investment groups fearful of the impact on minority shareholders. Since then, Kalifa notes the success that NYSE and NASDAQ have had with their more flexible model that imposes a minimum free float value threshold rather than a fixed percentage. NASDAQ and NYSE together accounted for 53% of fintech IPOs in the five years between January 2015 and December 2020. It could be time for London to follow suit as it looks to make its case as a world-leading venue for innovative companies.
- Dual class structure - another recommendation made by both reports is to allow companies with a premium listing to have a dual class structure. Founders of high-growth companies will be very interested in this proposal, as it would enable them to retain shares with enhanced voting rights, separate to the class of shares sold to the public. This would offer greater protection against dilution and unwelcome takeovers, especially in the years soon after an IPO. This is currently only allowed on the standard segment, which means companies that wish to take advantage of this option have to forego the attraction of being included on the FTSE indices.
- Indices - on the theme of indices, the Kalifa review has made the interesting suggestion of creating a global fintech index. We expect many insurtechs would welcome the opportunity to join a fintech index, with a label that more accurately captures the nature of their businesses, instead of having to choose between traditional categorisations such as ‘financial services’, ‘insurance’ or ‘technology’.
- Early stage access - Lord Hill’s recommendation that the FCA reviews the rules that allow scientific research-based companies to list at an early stage while being exempt from the standard revenue earning requirements, and considers broadening these to a wider range of high growth innovative companies across a variety of sectors, will be of interest to insurtechs considering accessing the capital markets.
Overall, the Freshfields insurtech team welcomes these recommendations and believe they have the potential to make London a much more attractive listing venue for insurtechs by providing greater flexibility, allowing founders to retain more control and potentially more relevant index inclusion.
The Kalifa review isn’t just limited to recommending changes for London’s listing environment and it also makes a number of regulatory proposals that will be of interest to insurtechs. You can read our team’s thoughts on this topic here.
If you would like to discuss any of the proposed changes or discuss the insurtech space more generally then please do get in touch with a member of the Freshfields insurtech team.
