The first half of 2019 has been, well, a game of two halves in IPO activity in EMEA. The first three months saw only one sizeable UK corporate IPO. The second quarter saw a broader list of candidates, both UK and overseas, with sizeable transactions successfully completed.
The second quarter however also saw sizeable transactions failing to price, in the UK and globally. Practitioners at the London Stock Exchange’s IPO Forum held in May said a lack of depth of investor appetite, multiplied by mixed or weak post-IPO performance across markets, means the longer list of candidates is finding it hard to press the button.
The disappointing level of issuance in 2019 to date was highlighted by the Financial Times in September. The article pointed out “So far this year 16 businesses have joined the main market against 24 last year. Eight companies have floated on the Alternative Investment Market against 29 in the first eight months of 2018” and went on to discuss why the lack of particularly small-cap companies coming to market “is a backward step for economies…with growth comes jobs”. More recent data indicate the number of IPOs is down 40% year-on-year in EMEA.
So we listened carefully to the successful issuer, shareholder and banker experiences of IPO execution which were discussed at the Forum. We thought there were six important quotes on execution topics, that summarise the transaction management lessons shared by those who have successfully navigated their way to a listing in recent times – and their advisors and investors. One overarching theme was issuers being increasingly aware of the challenges of life as a listed company after the IPO, given recent changes in research and the shrinking world of equitiesin general.
“Those that haven’t experienced this before don’t know what to be afraid of, and why…bring on extra capacity to handle the curveballs”
First and foremost, the company has to remain focussed on running its business. It’s the reason why the IPO is being considered, and the reason investors might buy the shares. Yet one issuer said often companies underestimate the demands of running the IPO process. It is a massive investment of management time and sheer exhaustion is not out of the ordinary, particularly in founder-managed companies.
Other key recommendations from experienced issuers include doing the early preparation to demystify and understand the workstreams, decide how much of the process you can de-risk early on, and do whatever it takes to remove the pressure from core management. As one financial advisor said, “those companies that have adequately prepared tend to be more successful and quicker to access windows when they open.”
We note that this clash between the focus on the business and the focus on the transaction execution, is precisely why The Deal Team was established, to create value by giving management teams back their time so they can focus on the business.
“We want to buy into a management team that *want* to run a listed company”
Public fund managers gave specific tests for what makes a good investment at IPO, apart from any valuation or sector-specific reasons. Firstly, are the management team personally keen on the IPO (and not just for compensation reasons)? Are there tangible business benefits to the IPO? And if so, is this a “miraculous inflection that occurs day 2 post IPO”.
Investors will want to see the company’s and management’s track record in the private domain, to support their belief in the equity story.
“Investors take a judgement on how aggressive the earnings guidance is. Instead, approach the problem on how at the time of first results, you can *make* the investor, wish she had bought more at IPO, and top up then.”
It’s important to recognise that the equity story is not solely a tool to come to a valuation, but the roadmap for the business post IPO. The same issuer giving the quote above also pointed out “If you break credibility in the fragile first few years, a company might possibly need to think in terms of a re-IPO – ie a reset and new engagement with investors.” Which may take years, and disrupt the Board, management and company, so one to avoid.
In further preparing for the IPO process and to increase investor trust in the earnings guidance and equity story, “consider the company’s existing disclosure, Wikipedia articles, legacy issues, or even no meaningful public disclosure. Invest in improving this pre transaction kick-off, because once the publicity guidelines are in place it’s very difficult to change anything.”
And as for press at the IPO – one advisor was clear that the “Financial media *will* write on you, so the reality is it’s quite difficult to write nasty things about someone you have had lunch with. Invest time in the financial PR, not just immediately prior to launch.”
“The role of the CFO changes fundamentally between pre and post IPO”
This is often a great surprise to the management team. One CEO was vocal about this change. He said that pre IPO the CFO’s key responsibilities are managing the balance sheet, and checking the numbers are accurate prior to being listed. Post IPO? The CFO’s most important job is being responsible for the earnings guidance, and managing analyst consensus about your company’s forecasts.
What is accurate after listing will need to take into account price-sensitive information disclosure requirements as well as verification, on top of setting the right tone about performance. The company’s reputation is now on the line.
For a CFO to be ready for that, they need to take time during the preparation of the IPO to train themselves on how to bring the new key messages to the various audiences; existing shareholders, new investors, employees, the press. This needs to be done in his own words, while still being in line with the IPO equity story.
“Be prepared to be very specific on LTIP KPIs”
An investor said that an issuer needs to “Don’t just say “standard KPIs” when asked about long term incentive plans. Which measures, how are they calculated, what are the targets, and has the business been managed to these pre IPO. We need to know the CEO/CFO is incentivised not to step down 6-12 months post IPO.”
“The IPO is a start line, not a finish line”
A CEO was clear that “By the time of IPO, the company needs to have a very good idea of the route to build public company infrastructure. Don’t need everything in place day one – but you *must* have thought it through.” In our work with issuers, The Deal Team considers itself to have two jobs supporting management in an IPO process – first, achieving the IPO smoothly, and second, helping the company with the preparation to be a listed company.
The same CEO went on to say that is was “Important to consider the right board, not just in the week pre IPO. A good Board can create real value. They are taking real liability and need to spend time getting comfortable. Also gives you time to create a persuasive statement on why that person is right for the role.”
Engaging in this forward thinking may cause you to bring other decision points earlier. For instance, “Consider being clear on dividend policy even if not immediately payable. It expands the addressable investor base which can help valuation.”
The IPO process is complex. It’s the biggest single transformation a company will usually experience in its corporate life, and yet it’s just the start of a new journey. The Deal Team’s professional transaction managers are here to support company executives with the minimum of distraction by preparing for both the transaction, and for life after closing, in both M&A and equity capital markets.
Please note – We’ve used our judgement to select the linked external information which we believe may be of interest. We are not however responsible for the accuracy, completeness or relevance of the information and opinions contained therein.