Smackdown (pg. 2)
So is this triumphalism justified? Is London really beating New York at its own game? The short answer is yes, in some ways, but in other ways, not at all. London has become a magnet for firms from emerging economies looking to raise capital and is the most important financial center in Europe. In fields including over-the-counter derivatives, foreign exchange, and metals trading, it has taken a worldwide lead. And it is catching up in private equity and hedge funds - 21% of global hedge-fund assets are now managed out of London - pumping new wealth into Mayfair and St. James, two smart West End districts that used to house the British upper class. New York still towers over London in the total amount of funds its firms manage and in the size of their compensation packages, but Gotham is discovering for the first time that it is not indispensable. As capital flows become global and competition heats up, it needs to fight to retain its role.
Yet not everything is going London's way, as financial markets adjust to a fast-changing world. Just ask Henk van Dalen. He's the CFO of TNT, a $17.4 billion Dutch mail and express-delivery company that announced in May it had decided to end its listing on the New York Stock Exchange. Several other big European firms, including British Airways, have also taken advantage of a change in SEC rules that makes it easier to delist from U.S. exchanges. TNT says it can satisfy its current and future capital requirements outside the U.S. and that it made the decision "after taking into account the regulatory, legal, reporting, and governance complexity" of maintaining a U.S. listing.
But in this case, New York's loss wasn't London's gain. TNT had pulled its listing off the London Stock Exchange a year earlier and is focusing all its efforts on its home market of Amsterdam. TNT still depends on international investors, especially U.S. institutions, but in these days of electronic trading and increased investor sophistication there has been an important shift. "Most investors now buy their positions in Amsterdam," van Dalen says, "so there's no need to be listed elsewhere. It's just a cost burden."
TNT isn't alone. Since 2000 the number of foreign companies listed on London's main exchange has dropped by almost 200, or 40%, and some of those withdrawing, including Nestlé and Nokia (Charts), have done so for the same reason as TNT: At a time when capital markets have become increasingly global, large firms can be selective about their geography. Even lesser-known firms such as Poland's Millennium Bank are pulling out. It says most of its stock trading takes place in Warsaw.
The reason London's IPO numbers look so good - and New York's, by comparison, so poor - is that the British capital has been nimble in attracting hundreds of smaller firms from around the world, including the U.S., to its less prestigious markets, especially the AIM exchange. It has also moved aggressively to capture listings from firms in Russia and other former Soviet republics. About 17% of London's IPO volume last year came from the flotation of Rosneft, a Russian oil company that became the country's biggest by acquiring the assets of Yukos, a private-sector rival driven out of business by the Kremlin.
For the moment Chinese entrepreneurial firms still seem to prefer New York as the place to get their international exposure, while Indian firms split down the middle. It can get complicated: One of the big New York Stock Exchange IPOs this summer was of Sterlite, the subsidiary of an Indian company that is listed in London.
The battle is far from over. In fact, it's just heating up. NYSE and Nasdaq are moving aggressively to extend their global reach through mergers with London's European rivals. They are being helped by the SEC's recent acceptance of International Financial Reporting Standards that differ from U.S. Generally Accepted Accounting Principles and by an official clarification it issued in May relaxing the costliest and most controversial part of Sarbanes-Oxley, Section 404, which requires that outside auditors monitor internal controls. Senator Schumer is relieved. "We feel very good about the progress," he says. "It'll be a big shot in the arm for New York."
In some ways, however, casting the shifts in global finance as a battle between New York and London is missing the point. Much of the expertise and part of the money helping fuel London's boom is American. Four of the top five dealmakers in Europe last year were U.S. investment banks, and KKR was easily the most active private equity firm. Moreover, U.S. institutional investors are buying a significant share of the stock offerings in London and elsewhere in Europe through private placements that bypass SEC regulations and that now dwarf IPOs in volume. Last year about $40 billion was raised on NYSE in public offerings; so-called 144A private placements, by contrast, raised a total of $137.7 billion, or more than three times as much.
"London has a creative energy that far outstrips its international infrastructure," says Hendrik du Toit, chief executive of Investec Asset Management, a South African firm. "Yet the U.S. capital market is still half of the world's money, so you can't avoid it if you want to do big things."
The real question facing New York and London is not about which city is winning a two-way race but how both can position themselves to continue prospering even as a legion of wannabe financial centers around the world try to grab that international business. Those are places like Mumbai and Shanghai, but also Warsaw, Dubai, and São Paulo - all growing fast in both volume and sophistication. That's the story the big international investment banks are monitoring closely. "New York has had its day, London is having its day, and Shanghai and Dubai will emerge," says Michael Philipp, who runs Credit Suisse's business in Europe, the Middle East, and Africa.
Jonathan Chenevix-Trench, chairman of Morgan Stanley International, agrees: "There's a natural and inevitable tilting away from New York because the world is more global. But it's absurd to call London the global financial center. We'll end up with an orbit of perhaps four to five dominant centers and some key ancillary ones around them."
How quickly that happens will probably depend on what happens to the global economy. One of the dangers to London is that it has become so reliant on international flows that it's particularly vulnerable to a downturn. Dominic Rossi of British fund manager Threadneedle Investments reckons that any significant correction in world capital markets "will hit London instantly - and we're talking about days not weeks." Jim Gollan, chairman of electronic exchange Virt-x that trades Swiss blue-chip stocks, concurs: "It's always worth remembering Warren Buffett's dictum that it's only when the tide is out that you can see who is swimming naked."