(Bloomberg) -- Activist investors looking for better returns are trying to convince London’s companies to list overseas.

Dan Loeb’s hedge fund Third Point has recently urged a range of large British businesses to move from London’s stock market to New York, according to people familiar with the matter, who didn’t name specific companies and asked not to be named discussing confidential information. He’s not alone in pushing the strategy, which is underpinned by the steep valuation discount for UK stocks compared with those in the US and elsewhere.

Loeb’s firm joins the likes of Cevian Capital AB, which last year pressured building materials supplier CRH Plc to move its primary listing from London to New York — and has said education publisher Pearson Plc should follow. Similarly, Sparta Capital Management, started by former Elliott Management trader Franck Tuil, has urged engineering firm John Wood Group Plc to consider a US listing.

“Lobbying for re-listings of UK companies in the US is going to be an important part of the activist playbook,” said Liad Meidar, managing partner of activist investor Gatemore Capital Management. “We have been engaged with companies on this idea and many companies are open to it,” he said, without giving names.

At the heart of the strategy is a yawning valuation gap. While S&P 500 companies trade at around 21 times on a forward 12-month price-to-earnings basis, FTSE 100 firms are valued at just over half that, with valuations trending lower since the Brexit referendum in 2016.

And it’s not just the US that’s seen as more attractive: Palliser Capital recently called on Rio Tinto Group to abandon its primary listing in London and unify its corporate structure in Australia, while Tribeca Investment Partners wants Glencore Plc to do the same.

Activists argue that other markets, particularly the US, offer deeper liquidity and better valuations. In the case of CRH, they’ve been right, with the construction company adding about $17 billion to its market capitalization since shareholders approved the move of its primary listing to New York last year.

Many also say that it doesn’t make sense for firms earning most of their revenues overseas to have their main ticker in the UK, especially in the context of a stagnant domestic economy and a pound that remains relatively weak despite recent gains.

“We often see arbitrage opportunities in valuation” between US and UK or European companies, said Marco Taricco, co-founder of activist firm Bluebell Capital Partners. A US listing for many businesses “may make sense provided the company has a meaningful presence in the US.”

But it’s not just about math: US companies are better placed to attract top talent, with management pay packages typically higher and fewer restrictions on directors owning shares, Gatemore’s Meidar said. And for certain sectors, like fossil fuels, the US offers a friendlier investor base than Europe — something Shell Plc’s chief executive officer argued in an interview with Bloomberg Opinion earlier this year.

Representatives for Third Point, Cevian, Sparta and Palliser declined to comment. Ben Cleary, a partner and portfolio manager at Tribeca, said there is a big discount for mining companies in London — even compared to their own global listings — and that Australia has a “mining-friendly investor base.”

“Closing the discounts helps us generate returns for our investors,” he said.

Activist pressure is compounding the woes of the UK’s stock market, which lost its crown as Europe’s biggest market by value in 2022, and has largely missed out on the region’s rebound in initial public offerings. Low valuations are also making British companies particularly attractive to foreign suitors, with names like Hotel Chocolat Group Plc and logistics firm Wincanton Plc being acquired for high premiums.

Political Dilemma

The exodus is a headache for politicians. Britain wants to simplify listings rules and lure growth companies to London, while Chancellor of the Exchequer Jeremy Hunt has proposed tax-free savings accounts for investing in UK companies. Still, chip designer Arm Holdings Plc — a darling of the UK tech scene, based in Cambridge, England — decided to list in New York last year, showing the magnitude of the UK’s problem.

Both of the UK’s major political parties are trying to reassure bankers and business leaders that they can bring stability to the City and keep hold of home-grown tech firms. One big question will be whether Labour, if it wins the general election on July 4 as polls predict, would be prepared to direct pension funds and ISAs — individual savings accounts — into UK assets.

To be sure, activist campaigns aren’t always successful: British American Tobacco Plc Chief Executive Officer Tadeu Marroco recently ruled out switching to a US listing following investor pressure, telling the Financial Times it “would create a lot of distraction internally.” And some firms are still choosing the UK: Online fashion retailer Shein is preparing a confidential filing for a London listing, Bloomberg reported on Monday.

Listing elsewhere also isn’t necessarily a guarantee of better performance.

“The US market can be very punitive,” said Bluebell’s Taricco. If you don’t have a large presence in the US or a large market capitalization, “you may risk being forgotten.”

--With assistance from Sagarika Jaisinghani, Katherine Griffiths, David Ramli and Thyagu Adinarayan.

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