Financial markets hate uncertainty and yet, for UK businesses, it’s the ‘new normal’. According to Tom Attenborough, Head of International Business Development, Primary Markets at London Stock Exchange (LSE), many are starting to acclimatise to the unknowns. “The idea of sitting and waiting until everything is completely clear two or more years down the line isn’t really an option for many people,” he says.
While activity on the LSE has largely been put on hold as we adjust to Brexit and the electoral vote, Tom predicts a pipeline of IPOs will come to fruition by October this year, triggering greater market confidence.
He believes that above 20 percent volatility on the VIX Index, a measure of the S&P 500, makes an IPO ‘tricky’, yet we’ve been in the mid-teens for some time, recently dropping to as low as 10.5 per cent.
“We’ve had a busy first half of the year with 43 IPOs to the end of June, raising about £6.2 billion. In comparison, there were 65 on the London market last year raising £5.6 billion, so we’re already ahead of last year’s run rate.”
Yet there are other factors affecting appetite, chiefly the strength of competing sources of capital. Private equity is sitting on almost record levels of dry powder with sovereign wealth funds looking to significantly expand into Europe.
Neil Glover, IPO Director for the UK&I at EY, believes this will be an ongoing trend. “The difficulty we’ve had recently, due to the depressed pound, is that foreign-based funds have been cherry-picking UK assets at a better price than they would have gained previously.”
For example, Logical, part of the South African IT group, Datatec, was due to be London’s largest IPO this year. Instead it sold to the Chinese sovereign wealth fund, CIC, for €12.5 billion having run a dual track process.
“We’re increasingly seeing that management teams, either PE-owned or with significant stakeholders, are getting frustrated that the sale is driven in that regard when they see greater value and reward in listing the business,” Neil explains.
Yet, there are success stories. Forterra, the leading UK producer of manufactured masonry products, whose investor took a phased exit, raised £370 million on the LSE.
Its CFO, Shatish Dasani explains: “The private equity house, Lone Star, very quickly realised the best way of maximising value was to do an IPO that enabled them to make a staggered exit from the holding. Initially, they sold 40 percent, ramping up to a complete sale over the last year. That was a core business consideration in Lone Star’s listing of the business.”
Its second option was to list in New York under its US group, but Shatish explains they were able to realise more value from floating in the UK where investors had a better understanding of the industry.
Both potential backers and Forterra took confidence in the fact the company’s rival, Ibstock, went to market valued at £770.5 million six months prior, and industry cohorts Breedon and Eurotel were also recent entrants at that time.
“From an investors’ perspective, a good body of sector knowledge had built up, which meant people could value the business much more easily,” Shatish surmises.
Hitting the numbers
Using a series of IPOs to sell a business’ equity off in stages is increasingly popular, says EY’s Neil. “PE firms understand that incremental sell-offs over a period of time do work better than just a large initial sell-down. We’ve seen that with Auto Trader and a number of others.”
Waiting for your share price to rise before divesting your remaining stake is an effective way to realise greater value, but to do so you must hit your numbers – a key point for any business new to the public markets.
In a bid to master this, some companies choose to operate as though they are a Plc ahead of listing, ensuring their finance function is set up for public life ahead of the IPO.
“If you miss any of your targets the damage can be permanent. It not only affects the business’ reputation, it affects the management team. They may go off to another company but they’ll be forever tarnished with that under-delivery. Investors have very long memories,” says Neil.
British tool and equipment-hire company, HSS Hire Group, was valued at £325 million with an opening share price of 210p when it floated in 2015, yet its stock slipped 25 percent having failed to hit both its first and second set of numbers. Its current market value has slid to £134 million.
Owners must also find the right price point when listing, ensuring a good return yet avoiding the temptation to float at a price so high it doesn’t leave room for shareholder return.
“It’s an immensely tricky one because, particularly if the business has a very large shareholder or is PE-owned, there is obviously a desire to maximise the value of the business at the time of listing. We’re increasingly trying to advise people to take a mid-range price to allow themselves room to have a good set of first year results that will drive the share price further forward,” Neil explains.
A strong leadership with experience of floating and of life as a public company will be vital in achieving each of these goals.
Having supported numerous executives as they’ve worked through the IPO process, Camilla Perselli, Relationship Manager at Criticaleye sees first-hand the need to build leadership capability in advance. “In particular it’s essential to strengthen the skills of the team below so that they can continue to hit their numbers as the top team focus on the IPO,” she says.
“The biggest, yet quite common mistake, is to underestimate the energy and commitment it takes to IPO. Believing you can have one eye on floating and the other on running the business means you’ll underperform on both.”
External support is crucial, especially if you’re not able to plug the skills requirements internally. In particular, there is a growing trend for strong Investor Relations specialists and external project managers, as Shatish notes.
“I’d spoken to a couple of CFOs who’d used project managers and had advised me that I should do the same. I think it’s good advice but by the time I arrived the process was too far gone, so we used external advisors to provide that support,” he says.
“It is an expensive process so we were very clear with advisors, whether they were on fixed or variable fees, making sure they understood payment terms, what success looks like, and where the milestones were.”
There is plenty of advice and support available for those who feel ready to float, but those wanting to wait should not fall silent. In fact, it’s essential to stay both up-to-date with the market and communicative with investors.
“We often hear from investors that they’re interested in getting to know businesses much earlier in the process, there’s no such thing as too early. They’ve always got time to meet with interesting businesses, it doesn’t matter if there’s no capital raising event,” says the LSE’s Tom.
By Mary-Anne Baldwin, Corporate Editor, Criticaleye
These comments were shared during Criticaleye’s recent Global Conference Call on IPOs.
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