Watch the replay of the conference and read our written summary below to find out the answers to those questions and more.
Following a bumper 2021 for IPOs, the public listing picture is markedly different so far this year. Whilst the appetite for IPOs remains incredibly strong, many companies have pushed out their IPO timetables due to the early uncertainties emanating from the conflict in Ukraine and tightening global liquidity conditions.
While bouts of market volatility may affect the timing of an IPO, the decision to list is typically not taken lightly, and is often years in the making. Therefore, it is likely only a matter of time before companies resume listing endeavours. Indeed, the overriding message from this year’s IPO Conference was that the choice to go public should be made with a long-term lens, as the benefits of listing go far beyond obtaining a maximum price.
The tone at this year’s conference was optimistic. Now volatility has subsided, and stock prices have regained pre-Covid peaks, industry professionals were bullish on the possibility of a rebounding IPO market. Investec experts, in addition to investors and companies, shared first-hand insights about the IPO process and the factors impacting the timing of a listing, as well as what it takes to go public.
Last year, fuelled by excess liquidity and ultra-low rates, public markets were eager to invest into the post-Covid economy. Across the main market and the AIM market, the UK saw £17bn raised in 126 IPOs – the highest number since 2014. The proverbial ‘IPO window’ was wide open, and companies were being priced at record valuations.
Then, as the conflict in Ukraine broke out, inflation shot up and energy markets dried out, public market investors pivoted their attention back towards their existing portfolios. Andrew Pinder, Head of UK Investment Banking at Investec, said markets were simply pausing for breath, as they assessed the impacts on people and businesses.
Now the FTSE 100 and FTSE 250 are once again trading at pre-pandemic, Bruce Garrow, Co-Head of Corporate Broking & PLC Advisory at Investec, said we can expect to see an increasing number of IPO opportunities.
Marcus Stuttard, Head of AIM & Primary Markets at the London Stock Exchange (LSE), agreed: “Talking to private companies, while a number of businesses have put IPO plans on hold for the first quarter, we expect them to start coming through during the rest of the summer and we expect the second half of the year to be even more buoyant.”
Pinder was also excited about the recent trend of public company M&A deals. He said: “That puts money back into the hands of fund managers to invest, but at the same time, it reduces the pool of listed companies to invest in. Ultimately, that presents a really exciting opportunity for private companies to come to the market because there’s a weight of capital and there’s a dearth of opportunities for fund managers.”
However, when the IPO market restarts, there was consensus among the speakers that it will continue to seek out quality. CEO at Amati Global Investors Paul Jourdan said: “My guess is that liquidity conditions globally are going to get tighter over the next year and a half. It doesn’t mean that IPOs can’t happen, but it won’t be anywhere near as much of a hot market. There will opportunities for the right companies. The market is always hungry for good long-term investments.”
As an avid investor into IPOs, Jourdan said one of the main things he looks for is businesses that are going public for the right reasons and understand the market: “The right reasons to float are that the company has a strategic use for public capital. These are companies where they’ve got a three to five-year vision of what that capital can do for them and they’re not fixated on what the IPO price is going to be.”
Too often, however, there is a short-term focus on price, often due to business backers wanting to exit and realise maximum value. If price and exit are the only considerations, companies are better off exploring a trade sale, said the speakers. Jourdan added: “What I don’t like are companies that just see an IPO as an exit. Yes, you can sell some shares at a great price, but you can also use your paper for acquisitions, for other corporate purposes.”
However, he explained it takes a long time to get there: “That’s the mistake a lot of companies floating make, they think this is all achievable immediately, and there’s a very obvious reasons why it’s not: the asymmetry of information. The market just doesn’t know the company well enough to give it that level of trust from day one.”
Pinder echoed this sentiment, reminding companies it is always better to under-promise and over-deliver. “Most important of all is setting a price that sets you up for a long-term journey on the public markets, so everyone leaves the party with a balloon – the owners of business and the investors coming in. Last year, unfortunately, a lot of IPOs were priced for perfection, didn’t live up to expectations and some of those have had significant share price reversals. When that happens, it is a long way back to earn the trust of the market.”
Longevity in listing
For companies with a long-term plan, the public markets can be very rewarding, according to the speakers. Stuttard pointed out one of the key distinguishing factor of the London market is the access it provides to genuine long-term institutional and international capital.
This was brought to life by the CEO of AIM-listed ITM Power Graham Cooley, who explained that since its listing in 2004, the business has had much more significant and rapid access to capital. Now covered by 21 analysts from major banks, compared to one house broker on IPO, the company benefits from stronger analysis, which is key for investors to understand the business.
Since listing in 2004, he explained ITM Power has also seen its share register evolve significantly. Originally dominated by retail and small cap institutional investors, the clean energy company has been able to attract larger institutional and international shareholders through subsequent fundraises, as it grew in scale.
In addition, he pointed out that share option incentivisation schemes are an effective retention tool for management teams. He said: “Holding options in the company, being an equity holder is extremely important. It gives focus on those executives to deliver on the plans in the market and increase the share price, so it aligns the executive team very strongly with the investors.”
To reap these long-term rewards, Bob Ellis, Chairman of home radiator manufacturer Stelrad, which listed in November of last year, described what is involved in the IPO process.
He said the level of explanation a company has to give public investors compared to private equity buyers, over a short timeframe, is very high. “There’s a whole bunch of stuff to explain that you never really had to think about explaining in the past – how did you arrive at your remuneration policy, for example. In our case, it was something that had evolved over a long period of time.”
Ellis said they drafted 27 policies in the space of a few months. Professional support was key for this, and if he could redo it, Ellis said he would better prepare. However, he added that management enjoyed the IPO process, as it provided a useful dialogue with analysts and investors, as well as helpful feedback for the business.
And indeed, communication does not stop with the IPO. After the listing is achieved, Cooley, whose business has been quoted for more than a decade, emphasised the importance of disclosure for operating in a regulated market environment. But crucially, he said this allows companies to access larger pools of capital more quickly.
In order to ease the IPO journey, Garrow and his team help companies de-risk the process. This involves conducting test marketing to gauge demand and minimising the execution risk. Through conversations with institutional investors and fund managers, the team is able to assess the likelihood of building a good order book. By following up with pre-deal investor education and a management team roadshow, this can drive up demand for the stock prior to announcing an optimal price range for the IPO.
Appealing to investors
For investors participating in IPOs, growth is key. Jourdan said he looks for companies with unrealised potential and strong fundamentals to back it up.
Increasingly, however, investors are also scrutinising companies’ environmental, social and governance (ESG) standards. Stuttard explained the LSE has created a ‘green economy mark’ for companies that derive more than 50% revenue from the green economy. With net-zero pledges multiplying, it is seeing increasing interest from companies eager to obtain this mark prior to IPO and use it as a selling point.
Alicia Forry, Head of UK Equity ESG Product at Investec, confirmed ESG is becoming increasingly discussed at IPO stage. Prior to listing, she said it is crucial for companies to establish the material ESG risks and opportunities, determine which individuals or groups are responsible for oversight, chose a framework for disclosure and an ESG score provider (if appropriate), disclose key ESG data, appoint someone to coordinate data gathering, and communicate on pre-IPO progress.
While these measures may be necessary for the IPO process, Jourdan said that as an investor, he likes to see things that are well thought through and not just done for the sake of it. On the governance side, he believes the independence of the non-executive team is critical, while on the environmental and social side, he is wary of excessive box ticking.
He said: “If you don’t find it important, don’t do it. It’s about encouraging companies to be the best companies they can, it’s not about endlessly doing things that are pointless and expensive. What responsibility means is more obvious than you might think.”