London Stock Exchange could be stripped of smaller firms by 2028, warns Peel Hunt

The London Stock Exchange could be stripped of smaller companies by 2028 if the pace of a current “feeding frenzy” continues, according to a top investment bank.

In a note to investors today, broker and City bank Peel Hunt said that the “relentless” speed of “de-equitisation” in London showed no sign of abating and was now threatening to decimate the smaller end of the market.

“If we extrapolate the current trend line, then the last company will leave the FTSE Smallcap [Index] in 2028,” said Charles Hall, Peel Hunt’s head of research. 

“This all sounds very negative – but the reverse scenario can happen and can happen quickly. It really needs a trigger to break the cycle.”

Hall added that there had been a “feeding frenzy” on the market in recent months as cashed-up corporate buyers pounce on lowly valuations in the City.

A total of 12 new companies came under offer in the first three months of this year and some 28 firms were subject to takeover bids last year. Over 150 companies left both the main market and AIM last year, according to the Quoted Companies Alliance.

12 new offers have been made for companies in the first quarter of the year (value £bn)

Among the active bids for companies, seven FTSE 350 have fallen into the sights of buyers compared to just two throughout 2023. The largest bids so far have been targeted at DS Smith, the paper maker, which is heading toward a potential £5.7bn tie-up with rival Mondi, and Virgin Money, which was subject to a £2.9bn bid from Nationwide.

The bigger deals “reflects greater corporate appetite and confidence in the economic outlook”, Peel Hunt said.

Buyers have also offered an average of 38 per cent higher than the current valuation implied on the London Stock Exchange, rising to 55 per cent for solely cash offers, underscoring the perceived valuation squeeze on listed companies.

Dealmakers across the City say they are now expecting a rise in deals throughout the year as appetite returns. John Farrugia, co-chief executive of investment bank Cavendish, added that deal activity was “picking up quarter on quarter now” as the economic picture settles.

“Inflationary pressures have subsided, and there is an expectation of interest rates falling over the summer, providing the right landscape for deal activity,” he told City A.M.. Private equity firms are leading the charge, having predominantly sat on their hands last year and now having the increased requirement to deploy capital.”

The fresh warnings will likely fuel fears around the health of the London Stock Exchange after a torrid 12 months in which new IPOs have dried up.

Just 23 firms floated on the London Stock Exchange’s two markets in 2023, a 49 per cent slide from the 45 registered in an already quiet 2022.

The downturn has rocked smaller banks like Peel Hunt. In a trading update this morning, the firm said it expected to report a second straight annual loss for its last financial year last year. 

Peel Hunt previously swung to a pretax loss of £1.5m for its 2023 financial year from a £41.2m profit the year before.