Broker warns 'urgent' action is required to stem City shrinkage

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London Stock Market Faces Shrinkage as Takeover Bids Accelerate

Immediate measures are needed to address the ongoing contraction of the London stock market, with analysts forecasting a further increase in the rate of opportunistic acquisition offers. Concerns are mounting about the future health of the UK equity market as firms are increasingly targeted for takeovers, exacerbating the market’s decline.

Surge in Takeover Activity

Companies listed in London have been the subject of takeover proposals valued at almost £9 billion in the first quarter of 2025. This follows a significant £52 billion in mergers and acquisitions activity throughout the previous year, according to research from Peel Hunt.

Adding to market woes, no new companies chose to list on the London Stock Exchange during the quarter, continuing a trend from 2024 which saw a mere three Initial Public Offerings (IPOs).

Factors Driving Market Decline

The UK market has experienced successive waves of takeover approaches in recent years. Bidders are attracted by comparatively low valuations, partly driven by a consistent outflow of investor capital from UK equity funds.

Brokerage data indicates that UK equity funds have witnessed investor withdrawals in 44 out of the past 45 months. The single month of inflows was attributed to Autumn Budget tax revisions that were perceived as less burdensome than anticipated.

Impact on Growth Companies

Acquisitions have disproportionately targeted smaller, growing British companies. Simultaneously, there is a noticeable lack of new enterprises emerging to list on public exchanges, and a growing number of existing businesses are choosing to delist.

This trend has resulted in a significant reduction in the number of companies listed on London’s AIM market. Figures show a 36 percent decrease since 2018, accompanied by a 60 percent fall in the index’s market capitalization from its peak in 2021.

Accelerated Departure Rate

Charles Hall, Head of Research at Peel Hunt, noted the increasing pace of companies leaving the market. He stated, ‘The rate of departure has accelerated in the current year, with 44 companies already considering leaving.’

He elaborated on the reasons for these departures: ‘Of these, 16 are due to M&A, eight are moving to the main market, and 20 are delisting.’

Continued Acquisition Pace Expected

Analysts anticipate that the tempo of mergers and acquisitions will remain ‘at heightened levels’. Currently, there are 15 active takeover bids for London-listed firms, each valued at over £100 million.

Private equity bids, which constituted only 30 percent of transactions in the first quarter, are projected to rise as ‘financing conditions improve’.

Attractive Valuations for Buyers

Hall further explained the dynamics of the current market: ‘Currently there are willing buyers (attracted by the valuations available and the probability of a successful conclusion) and willing sellers (due to fund outflows and the scale of premia).’

Call for Government Action

The brokerage firm has cautioned that governmental intervention is crucial to ‘urgently address the importance of UK capital to support UK companies’ and to revitalize the domestic equity market.

Peel Hunt emphasized the need to resolve fundamental issues within the UK market structure to sustain a robust equity market, particularly for small and mid-sized enterprises.

‘It seems obvious that there are structural issues in the UK that need to be addressed to retain a healthy UK equity market, particularly for Small & Midcap companies.’

The report suggests key areas for policy changes: ‘The UK needs to address the demand side if it is to retain its growth companies and to ensure that the equity market is able to provide long-term growth capital.’

Recommended measures to bolster the market include: ‘This can be delivered through pension reform, ISA reform, establishing a national wealth fund, and addressing stamp duty.’

Real Estate Investment Trusts as Prime Acquisition Targets

Among London-listed companies targeted for takeovers, a significant portion, six in total, are funds and real estate investment companies. These entities have become increasingly attractive to buyers due to persistently large discounts relative to their net asset value.

Peel Hunt also highlighted ‘a focus on increasing scale in order to increase relevance to a broader range of investors’ as a factor driving takeover interest in this sector.

Concerns Over Asset Valuation

Matthew Norris, Head of Real Estate Securities at Gravis, commented on the nature of private equity bids in the real estate sector. He observed that while many offers ‘claim to be a generous premium to recent share prices’, such proposals might obscure the true underlying value of these assets.

‘The same story is being repeated time and again,’ Norris stated, pointing to a pattern in takeover approaches.

He elaborated on the strategy employed by bidders: ‘A bidder offers a significant premium to recent prices, and dealmakers present it as an undeniable win.’

Norris cited recent examples: ‘We’ve seen this with Assura, where KKR’s private bids were focused primarily on historical share prices, rather than the true intrinsic value of the company.’

Another instance was highlighted: ‘Similarly, with Warehouse REIT, the bids from a consortium of private equity firms were marketed as a premium to past prices with little mention of valuation metrics and no mention of future value creation.’

Norris concluded by emphasizing the potential long-term implications of these approaches: ‘It overlooks the long-term earnings power of the companies, and the future potential of the assets involved.’

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