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By Rana Foroohar
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Ten years ago the British gave up investment banking, selling off financial-services firms one by one to American behemoths. Ever since, the conventional wisdom has been that London would always play second fiddle to Manhattan as a global investment capital. But some surprising figures for 2005 are forcing investors to think again. Not only did London overtake New York as the market of choice for international IPOs, but Europe (led by London) surpassed the United States in terms of the value of all new listings.The numbers say a lot about the changing nature of global finance.
For starters, growth is coming from emerging markets--and many emerging- market companies are heading to London to raise money. The trend is largely due to Sarbanes-Oxley, the complex corporate regulatory regime put in place by the U.S. government in 2002 after the Enron debacle. "Sox" reporting standards are so arduous they are scaring away many foreign companies that might have chosen to list in New York. Individual companies are reluctant to state their Sox aversion on the record, for fear of being seen to play regulatory arbitrage. But in a London Stock Exchange survey of international firms that went public last year, 90 percent said the demands of Sarbanes-Oxley made listing in London more attractive. The result was a record year for international listings in London, including whoppers like the $1.6 billion IPO of the online gambling site PartyGaming.
At the same time, the LSE is aggressively marketing the City as the world's "true" global financial capital, pointing out it does the most international equity trading, has the largest pool of international funds and is the world's leading cross-border lender. "There's $700 billion worth of institutional capital here invested in foreign equities," says Tracey Pierce of the LSE.
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London's claim to be the capital of global finance is a bit cheeky, given that the market caps of both the New York and Tokyo Stock Exchanges are larger than the LSE's. But it has one surprising edge. Among the big three financial capitals, London is the only exporter of financial services. While the United States runs a $6.82 billion trade deficit in financial services, and Japan runs a $610 million deficit, Britain enjoys a $32.6 billion surplus, according to 2004 IMF figures, the latest available.
How is it that Japan, with its notoriously protectionist system, and the United States, with its enormous financial industry, can be importers of financial services? A lot has to do with one of the least sexy sectors of the money trade, far from the hedge-fund sharks and private-equity barons: insurance. The United States runs a $17 billion surplus in banking services, but that's more than erased by an insurance deficit of nearly $24 billion, much of which is provided by Europe.
Insurance is less important to the U.K.'s export surplus, accounting for about one third of the total. Banking provides the rest. While the United States and Japan boast large home markets, the British market is only about one fifth the size of America's, and its bankers have had to go abroad to prosper. London has gained ground in key growth areas of banking, particularly as the European markets have consolidated there. Europe's share of the global financial market is increasing: for example, Europe now accounts for 63 percent of the international commercial-bank market, compared with just 17 percent in the United States.
None of this means Wall Street is suffering. The American markets are still the most liquid in the world. And since Margaret Thatcher's deregulation in the 1980s, American banks have dominated the City. Likewise, many American venture-capital firms like Benchmark have big offices in the City, which expects to add thousands of jobs.
A raft of new deals in 2006 will ensure they do. Europe now does more M&A deals by volume than the United States, and that trend is likely to continue. Increasing privatization on the Continent will further fuel business in London. A recent Morgan Stanley report says Arab oil windfalls are flowing to London as well, because Middle Eastern investors have trouble buying in the United States. London has become so popular for emerging-market investors that some fund managers are calling for tighter rules to ward off dodgy outsiders.
Recently, the Corporation of London, which represents the city's financial district, opened offices in Beijing and Shanghai to promote financial ties between China and the U.K. Britain's financial-services companies may not be strictly British--but as long as the money keeps coming, few in the City seem to care.
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