Taking a company public can raise capital for growth, boost an organisation’s brand profile and provide attractive incentives for staff. Diane Craig, head of capital markets at RSM UK, outlines the importance of preparation, early advice and a management team that embraces the process.
Investors and public markets don’t like uncertainty. But, after an initial hiatus at the start of the COVID pandemic, markets have been buoyant again, according to Diane Craig, head of capital markets at RSM UK and a member of ICAEW’s Corporate Finance Faculty board.
During 2020 and 2021, Craig and the RSM capital markets team have advised on a range of initial public offerings (IPOs), including three within a four-week period between March and April 2021. This included the £208m IPO of refurbished consumer technology business musicMagpie and the £83.8m IPO of long-life ready-meal business Parsley Box.
Companies and investors considering IPOs faced a new reality of working virtually when the pandemic hit. Craig says: “Once there was an acceptance that COVID was going to be with us for a while, the hiatus started to reverse. We started to see deals that had slowed down get re-engaged and it’s been quite common during COVID for roadshows to be completely virtual.” Although this may revert over time, a mix of virtual and face-to-face contact could be retained.
Craig adds: “From my perspective, I’ve got visibility on confirmed future IPO mandates well into late 2022, further out than I would normally expect to have, so there are definitely indications that the markets are strong and will continue to be in the short term, barring any new roadblocks.”
IPO drivers
There are a number of reasons why businesses access capital markets. The most obvious is to raise equity and funds from institutional investors. “It’s the ability to access funds at the time of listing, which can allow them to fulfil their strategy, fund growth or fund product development. But it’s not just access to those funds on IPO, it’s the access to those funds on a continued basis,” explains Craig. “If a company goes to market to raise money to fulfil a goal or strategy, and they do just that, then institutional investors are very supportive for secondary fundraises.”
But not all companies seek to raise funds at the time of listing, says Craig. For some companies, being listed could boost their brand and profile. Listing can also be used to incentivise staff or help to attract new talent. For companies that want to grow organically or are interested in acquiring other businesses, having listed shares can give them currency instead of cash to make follow-on acquisitions, or they can use a mixture of cash and shares, she explains.
Although some business owners may think of IPO as an exit, in most cases it’s not, according to Craig. It can be a useful exit, she adds, such as for non-management private equity, but investors want to see management and key people retained in the business.
Craig says: “Some companies spend a lot of time and effort getting listed and think once their shares are traded, that’s the end of the process. But, actually, that’s the start of their life as a listed company. That’s something that some companies or management teams don’t always understand. They’re focused on ‘what does the IPO itself achieve’ and not necessarily thinking about life post-IPO.”
Preparation is key
Craig emphasises the importance of being prepared when choosing the IPO route and showing that you have a compelling business strategy. “You have to have a story to tell investors that they are interested in. It’s not just that you’ve got a historic story of doing well; there has got to be a future growth story,” she explains.
Companies may underestimate what completing an IPO entails and the amount of management time it requires, which could make the process longer or more complicated. Managing valuation expectations is another potential issue. If a company has been thinking about an IPO early and been speaking to brokers, their expectations are likely to be more realistic, suggests Craig.
The earlier you start talking to advisers and open a dialogue with potential investors, the better, she adds. “Almost all companies I work with, before they really start the IPO process in earnest, they start those discussions with investors. That often includes marketing presentations very early on, which gives them a good indication of market appetite before they embark on a very intensive process.”
Investors tend to invest in areas they are interested in, but investor appetite and market dynamics can also be influenced by circumstances. For example, amid the pandemic, this may include organisations with a business model that fits the COVID world, says Craig. She gives the example of an investor whose portfolio may traditionally include brick and mortar retail but, during the pandemic, has been keen to diversity into stocks with more of an online retail presence.
“The more prepared you are, the less onerous the IPO process should be,” emphasises Craig. “You don’t want to give investors a reason to say no. You want a good management team, a good track history, a compelling story for the strategy and the growth going forward.”
Investor relations and external scrutiny
Craig does not interact directly with investors in her role, but points to regular and open dialogue as a key rule of thumb. This includes telling investors not only the good news but also the bad, or when you’ve hit a bumpy patch. “If you’re telling investors you want to do xyz, then you have to deliver. Investors expect you to deliver. If you can’t deliver for reasons outside your control, investors understand that. They’re reasonable, commercial business people.”
She adds: “Investors on the UK capital’s market tend to be biased towards institutional investors, such as pension and insurance funds. They’re not short-term investors… institutional investors are investing to form and support that medium-term relationship.”
Overall, concludes Craig, it’s about embracing the process, getting advice early and understanding the differences between being private and public. For some companies, the third-party scrutiny that comes with listing – whether from investors or the press – can be a culture shock, as can the obligation to make public announcements. “They’ve got to accept that they’ve opened their doors to that,” says Craig.
She adds: “If you’ve got a management team and a board that understands all of that, then they should have a smoother, more successful journey, not just for the IPO but beyond as well.”