The most talked-about flotation of the year is now firmly underway. The end of March saw the food delivery giant Deliveroo launch on the London Stock Exchange, a landmark flotation for a food delivery company and the largest LSE flotation in over a decade, valued at $7 billion.
In the run-up to the big launch, many in the UK and beyond, including high-profile figures in the British government, were keen to tout the Deliveroo IPO as a major boon for both the LSE and the UK economy, which has been battered by the economic crisis of recent months.
So, does the much-anticipated Deveroo IPO spell a brighter future for the LSE and the UK economy, or do more insurmountable troubles lie ahead?
A Rocky Start for Deliveroo
It is important to note right off the bat the Deliveroo IPO has not gone as well as was expected. Despite the optimistic statements from the Deliveroo top brass in the runup to the flotation, critics were already warning that the company was immensely overvalued, with an estimated $7 billion market cap, despite the fact that the company has never made a profit at any point in its history.
Those critics likely felt vindicated when the IPO got off to a disastrous start at the end of March, as Deliveroo’s share price immediately sunk 15%, then fell by a total of 31% over the course of two days. This is, by far, the worst performance in decades for a major LSE listing, and one that does not bode well for the future of the LSE.
Interestingly, Deliveroo’s initial flop was largely the result of an investor backlash, with various investor groups stating that they were flat-out refusing to purchase Deliveroo stock because the company’s treatment of gig economy couriers does not align with responsible investment principles.
In addition, some investors balked at the significant powers given to the Deliveroo CEO Will Shu, who will have 20 times the voting power of anyone else on the board. Some commentators, such as the financial talking heads at Bloomberg, have described the float as a terrible endorsement for LSE floats and a development that could deter future major tech floats for years to come.
Of course, it is worth noting that the blame cannot be placed squarely on Deliveroo or the LSE. Market conditions for tech stocks have been dire since the beginning of 2021 across all major economies, as confidence continues to slide and investors begin to realize that the eye-watering tech valuations of 2020 were far too much. In addition, the over-valued food delivery industry has been suffering a similar fate to Deliveroo.
The US company Door Dash saw its share price drop 24% in March, while the Danish delivery service Just Eat and the German courier Delivery Hero have seen similar drops in recent months. Much of this can be attributed to a much-needed market correction after the sky-high valuations of 2020, as well as the fact that, as the economy opens up again, the demand for the services offered by these companies is already starting to wane.
Rising Competition
The Deliveroo float, regardless of its initial trials, has restarted an energetic conversation about the future of the LSE and the role of the UK economy in the world. After all, LSE was, for many decades, the undisputed epicenter of the stock market, before being superseded by the likes of New York, Tokyo, and Shanghai.
In addition, London is now seeing increased competition from European trading centers. At the beginning of 2021, the Amsterdam Stock Exchange surpassed London to become the world’s largest center of Euro-dominated stock trades, owing largely to an exodus of such activity from the City due to Brexit.
Meanwhile, London has faced increasingly intense competition from the Deutsche Börse in Frankfurt in recent years, with the German exchange hoovering up billions of pounds worth of activity in the form of euro-dominated interest rate swaps.
London might have found some respite in March after the LSE managed to secure a deal with Frankfurt, in which both exchanges will work together on trade tied to UK-equities. Although this was touted as a victory, it is becoming abundantly clear that London is on the back foot.
Forex: The Key Strength of London
One area where the City seems to have retained global dominance is in the area of foreign exchange, or forex trading. As of now, more than $6.6 trillion of forex trades are executed in London every single day, with the City accounting for 37% of the global forex trade.
This is a position that puts London at a huge advantage over other financial centers, especially given the growing importance of forex. As we have seen from the rise of home forex trading platforms, which allow anyone to begin trading on foreign exchange markets with a real broker, it is clear that the importance of this activity to global markets is not going anywhere.
The proliferation of home forex trading platforms such as Meta Trader 4 will continue to bolster the importance of London as the global epicenter of foreign exchange, something that will undoubtedly give the LSE a boost along the way.
A Future Tech Behemoth?
So, will the LSE become a global tech behemoth, as the supporters of the Deliveroo IPO have hoped? It is clear that despite some recent setbacks, London could still achieve this goal.
In terms of tech seed funding, venture capital, and the rate of new startups, the UK and London far outstrip any other financial center in Europe, with the closest competitors, Paris, Amsterdam, and Berlin, attracting a fraction of the money that London has raised.
In addition, the LSE’s recent $27 billion acquisition of Refinitiv, a major financial analysis firm, has been touted as a game-changer that will massively increase the LSE’s attractiveness as a place for tech companies to do business.
While the LSE and the City of London are struggling to find a new role for themselves in a post-Brexit future, the outlook might be less bleak than the Deliveroo IPO would suggest.