Shein Steers Tough Course in Pursuit of Blockbuster London IPO

After a long wait, London bankers are hopeful that initial public offerings (IPOs) will make a comeback. The potential listing of Shein, a fast-fashion company, with a valuation of £50 billion ($64 billion), has sparked excitement in the City, as it could potentially reverse the IPO slump.

However, achieving this feat will not be without challenges. Shein will have to convince regulators, politicians, and investors that it meets their standards for inclusion in what could be one of the largest IPOs in the UK’s history.

Critics argue that a Shein listing in London would transform the City into a last-resort market. They point to concerns regarding the company’s environmental, social, and governance practices, including allegations made by US politicians that Shein’s products are associated with forced labor. Shein, on the other hand, has strongly stated that it has a strict policy against forced labor.
According to Bloomberg News, Shein has changed its listing plan from the US to the UK after lawmakers called for investigations into concerns about the company. As Shein prepares to file for an IPO in London, it has received qualified support from the opposition Labour Party, which is currently leading in the polls for the upcoming general election. The London Stock Exchange is currently experiencing a significant decline in IPO activity, and Shein’s backers are hoping for a solution to this slump. Xavier Rolet, former head of London Stock Exchange Group Plc, commented on the slow IPO market in the UK compared to the thriving market in the US.
The UK’s listing authority, the Financial Conduct Authority (FCA), holds the authority to reject initial public offering (IPO) applications if it deems them detrimental to the interests of investors. However, in a market that accommodates oil producers, tobacco companies, and miners, not all environmental, social, and governance (ESG) considerations automatically disqualify companies.

According to Nick Bayley, a former head of regulation and trading services at the London Stock Exchange and ex-senior markets adviser at the FCA, there is a high threshold for refusing listings based on reputation or investor protection concerns. Bayley suggests that Shein, the subject of discussion, may meet the regulator’s requirements.

Bayley notes that in the 2000s, London welcomed companies from the former Soviet Union with questionable backgrounds, while the American market would have rejected them. This highlights the difference in approach between the two markets.
In a rare instance of bipartisan agreement, politicians from both the Republican and Democrat parties in the US have called for investigations into Shein over concerns of forced labor allegations.

Among the US senators requesting action, Marco Rubio has asked the US Securities and Exchange Commission to consider blocking Shein’s listing, citing the need for more transparency regarding the company’s operations in China. Virginia Representative Jennifer Wexton also expressed her opinion last year that Shein should be required to prove that its products are not sourced from forced labor if it wants to go public in the US, in response to reports of the IPO filing.

According to Bloomberg News, leaders from both of the UK’s major political parties have met with Shein, although neither has publicly voiced support. While the Labour party has no intention of blocking the move, it has yet to conduct its due diligence, according to sources familiar with the matter.
The only person who has publicly spoken against Shein’s listing in London is Nigel Farage, the leader of Reform UK. In an interview with The Sunday Telegraph, Farage expressed his belief that such a listing would be a “very bad idea” and would not address the ongoing IPO crisis in the City.

Shein is obligated to comply with the UK’s Modern Slavery Act, which aims to combat human trafficking. This Act requires companies to annually publish a statement on their website, detailing their efforts to prevent forced labor in their business operations and supply chains. Shein’s most recent statement, dated July 2023, is available on their website.

However, Labour Behind The Label, a UK-based organization advocating for workers’ rights in the clothing industry, believes that the Act’s standards are insufficient. As a result, they oppose Shein’s listing in London.
“The organization’s policy lead, Anna Bryher, stated that the Act does not require companies to conduct due diligence or report on the success or failure of their commitments. It only mandates a risk analysis, which is a minimal requirement that needs to be improved in UK law.”

In addition to labor practices, Shein will also need to disclose any pending litigation, including cases brought against them by H&M and Uniqlo for alleged intellectual property violations and anti-competitive tactics against rival Temu.

Former LSE Group CEO, Xavier Rolet, mentioned that during his tenure, he had not witnessed the regulator bending the rules to accommodate a company. He emphasized that if there is a discrepancy between a company’s actions and the rules, the FCA will reject it.

Representatives for Shein, the FCA, and the LSE Group declined to provide any comments.

Marketing Effort
If Shein decides to list in London, it would require a significant marketing effort. Despite impressive sales growth of around 40% to $32.2 billion and a doubling of net profit to approximately $1.6 billion last year, the company would still need to invest in promoting its listing. This information comes from an anonymous source.

While a bid for inclusion in the FTSE 100 index may be appealing to some investors, Shein would need to float a large portion of its shares to be seriously considered. This would increase the risk associated with the listing.

To alleviate concerns among potential investors, Shein will need to provide transparent and comprehensive disclosures regarding environmental, social, and governance (ESG) factors. Matt Evans, a portfolio manager at Ninety One, believes that Shein’s willingness to consider a London listing indicates that they are confident in their ability to address these ESG considerations.
According to Mark Spiers, a partner at regulatory consultancy Bovill, investors have the ability to factor in compliance issues and penalize a listed company for labor violations. He highlighted that there are numerous mining firms and other companies listed in London that have questionable supply chains, environmental records, or engage in online gambling with questionable social value. These companies attract or repel investment based on individual investors’ ESG (Environmental, Social, and Governance) tolerance.

Some investors may choose to abstain from investing in an initial public offering (IPO) and observe its performance before making a decision, while others may opt to avoid it altogether. Alasdair McKinnon, chief investment officer of Sgurr Ventures, expressed concerns about companies that list in locations far from their headquarters, as they often tend to be problematic. McKinnon speculated that other investors may support the IPO if they believe they can successfully participate in the “greater fool” game, wherein they rely on finding someone willing to pay a higher price for the stock in the future.

–With assistance from Swetha Gopinath and Jennifer Creery.