This article is part of a series on the Future of the City of London

When The Hut Group floated in September at a £5.4bn valuation, the online retailer’s chief financial officer rang a small bell in its offices near Manchester airport.

It was a modest way to mark the UK’s biggest initial public offering in five years. And a striking difference from New York where Airbnb founder Brian Chesky’s face was beamed into Times Square for last week’s IPO.

Razzmatazz is not the only area where London is lagging. While the City of London remains a global superpower in a number of areas of finance, that is not true of its stock market.

Lacking the megacap tech stocks that dominate in the US and China, the FTSE 100 is now trading at one of the widest price-to-earnings discounts to the S&P 500 for 15 years. In the past five years, the UK has delivered the worst returns of any major European, Asian or North American competitor, according to FactSet data on MSCI indices.

The US offers bigger pools of capital and the prospect of higher valuations. It also tolerates premium voting rights for entrepreneurs such as Mr Chesky. In the UK, insisting on enhanced power for original investors at the expense of regular shareholders — as Hut has — bars companies from FTSE indices and the tracker funds that follow them.

“It goes without saying that the US is the biggest capital market by a country mile,” said Hut founder Matthew Moulding. “If valuation is your driver then it's difficult to compete with.”

In the end, though, Mr Moulding decided that a US listing “felt like the wrong thing to do on a personal level”. Hut’s London IPO was 15 times oversubscribed and Mr Moulding said he was made to feel welcome by London exchange executives.

Recognising that other entrepreneurs will choose differently, Mr Moulding is encouraging reforms to help London compete. UK ministers are reviewing the listing regime, with an eye to attracting new companies just as other financial capitals look to exploit the UK’s departure from the EU.

Long seen as the home for banks, insurers, oil companies and miners, London needs to reflect “an increasing shift towards fast-growth technology, ecommerce and science companies”, according to the government’s consultation.

London’s IPO market has been dominated by financial companies

New listings are badly needed. The UK equity markets have been shrinking faster than other European exchanges, according to a report last month by consultancy Oxera. The number of listed companies has fallen by a fifth since 2012.

Mark Dickenson, co-head of corporate broking at HSBC, said the “de-equitisation” threat appeared to be picking up again, given a wave of take-private offers for UK businesses. There have been 14 in just over a month.

Mr Dickenson’s concern “has always been about the ability of the London market to replenish”, he said. “‘Classic’ British businesses are being taken off the market but a balancing positive is the large pipeline of IPOs coming to the UK market in 2021.”

Ross Mitchinson, co-chief executive at Numis Securities, agreed. “There are a lot fewer companies listed today than 10 years ago but that trend might start to reverse,” he said, adding that the pipeline was filled with “digitally enabled, higher growth companies where the public markets are willing to pay multiples that reflect those good growth prospects.”

Companies seeking a public listing next year include shoe maker Doc Martens, card company Moonpig, and Deliveroo, the online delivery firm.

The FTSE 100’s lack of tech constituents has held the index back

“The absence of British technology companies on the London Stock Exchange makes it look like a heart patient with severe chest pains — it's under real threat but it's not too late,” said tech entrepreneur Mike Lynch, an investor in Darktrace, a cyber security company that is lined up as one of the cornerstone listings of next year.

Charlie Walker, head of primary markets at the London Stock Exchange, said Hut had “changed the debate” over whether large tech companies would want to float in the UK.

Other executives fear London is too complacent. “I have more contacts in the White House than I do in Number 10,” said Ali Parsa, founder of Babylon Health. “They are asking, ‘how can we make the US a more attractive place?’”

“The depth of the capital market is so much more in the US — it's significantly deeper across all structures,” he added. “Between New York and Asia, London is being squeezed.”

City financiers said that the test will be whether the UK can hold on to large London-based international tech businesses that could look to list, such as fintech companies Revolut and TransferWise, and Babylon Health, a digital health company.

Even that is not the end of the story. Tech companies that were founded, grew and sometimes listed in the UK are always vulnerable to deep-pocketed foreign acquirers.

“This is a long-term problem,” said Mr Lynch. “We were worried about Misys and others, Deepmind and Magic Pony being sold. It's all one way. And with the sale of companies like Arm Holdings [to US chip company Nvidia], it's an incredible amount of power we have given up.”

Mr Lynch was involved with one such deal, the $11bn sale of UK-based Autonomy to Hewlett-Packard in 2011. Autonomy, a software company that Mr Lynch had founded and ran, later unravelled and the US Department of Justice charged him with fraud. He denies the charges.

The more realistic near-term challenge may be to stay on top in Europe after the UK definitively breaks with the EU. “The UK is the premium listing venue in Europe and needs to fight to stay there in face of the competition from mainland Europe,” said Tom Johnson, head of equity capital markets at Barclays.

Without Brexit — and if a proposed merger between the LSE and Deutsche Börse had not been blocked by EU competition authorities — London could have cemented its position at the heart of the capital markets union.

Still, with its access to capital, talent pool and infrastructure, many in the City are confident that London can continue to see off smaller regional rivals.

Brokers are also confident that the London market passed a major test during the pandemic: raising close to £40bn for more than 400 businesses seeking emergency funds.

Trevor Green, head of UK institutional funds at asset manager Aviva Investors, said that this year had been a “crunch time for City investors . . . in virtually every case they have delivered for companies”. He added: “Post-Covid, companies will want to raise equity to fund expansion and M&A. So being public helps in good and bad times.”

London also has an advantage in its emphasis on strong corporate governance, say brokers. There have been prominent exceptions, notably former FTSE 100 company NMC Health, which collapsed into administration in April amid a suspected fraud. With the focus on larger companies, the AIM and FTSE 250 markets are sometimes criticised for falling under the radar.

Line chart of IPO volumes by deal value ($bn) showing London lags leading exchanges for new listings

But if London’s calling card is to be the gold standard in corporate and environmental standards, that is off-putting to a large number of companies who want looser rules.

In its report, Oxera said the regulatory burden was a significant disincentive for businesses to float and maintain a listing in the UK.

Barclays’ Mr Johnson said that listing rules have not changed enough over the past four decades: “The people who buy into IPOs are global. The rules do not reflect that.”

The UK listing review is looking at areas to boost London, including relaxing free-float requirements and the sorts of dual-class share structures that many tech entrepreneurs prefer.

“This is an opportunity to create a more enterprise-friendly place — the Delaware of the world,” said Mr Parsa, pointing to the US state’s legal regime that has made it attractive to businesses. “[London] needs to go further, to make it easier, more progressive and more entrepreneurial.”