The broader equity market backdrop is starting to look brighter, and potentially supportive of IPOs, after what’s been 18 months of reduced activity, with the COVID-19 pandemic, the war in Ukraine and a high inflationary environment curbing appetite for new deals. Market volatility is now below its long-term average, suggesting we could see a resumption of IPOs in the second half of this year and into 2024.
To help shed light across a spectrum of relevant considerations for private companies and their shareholders where IPO may be a potential future strategic growth avenue, Investec hosted a conference on 25 April 2023.
Sharing their views and experiences of taking a firm public were:
- Carlton Nelson – Head of Corporate Broking & PLC Advisory at Investec
- Daksh Gupta – ex-CEO of Marshall Motor Holdings plc
- Georgina Brittain – Senior Portfolio Manager at JP Morgan
- Jeremy Punnett – Director at M&G
- Michael Ansell – Partner at h2glenfern
- Jonathan Arrowsmith – Head of Investment Banking at Investec
- Alicia Forry – Head of UK Equity ESG Product, Investec
- Tim Smith – Chairman of Cranswick plc
Why Consider an IPO?
IPOs are often used as a way of raising capital to fund growth, or crystalise value for a company’s founder. With a stock market listing, shares can be used as currency to finance acquisitions; and so the IPO can provide the fuel for both organic and inorganic growth. They also generate publicity and raise a company’s profile.
IPOs can prove more attractive than an outright sale as they allow owners to raise capital and diversify their investor base while retaining control. Furthermore, a listing on the LSE can facilitate a balance of sound governance and access to deep, established pools of capital.
One of our speakers, Daksh Gupta, ex-CEO of Marshall Motor Holdings plc, described how the company was transformed by its IPO in 2015. The money raised financed acquisitions that boosted its geographic reach, scale and product offering. And he said the benefits of his IPO went beyond fundraising. The increased scrutiny of a public listing helped Daksh instil a healthy performance culture, while share awards helped him attract and motivate key talent.
Preparing for an IPO
Daksh urged private companies to appreciate the time, work and resources involved in IPO planning. Although it’s possible for the process to be completed in only a few months, it often takes over a year. For family business owners in particular, an IPO is a life-changing event.
Management teams must keep their eye on the day job, as a successful IPO depends on a thriving business. Consequently, appointing the right advisors to support management teams is critical.
Georgina Brittain, a senior portfolio manager at JP Morgan, outlined what she looks for in an IPO candidate, from an investment perspective.
She stressed that, above all, management must articulate a simple, compelling ‘equity story’ explaining the business model and growth opportunity. Management must then consistently deliver on that story, year after year. Firms with excess cash should pay dividends to shareholders, whereas growing businesses should reinvest profits. She also prefers companies with low debt levels.
Carlton Nelson, Head of Corporate Broking & PLC Advisory at Investec, suggested that institutional investors often prefer simple, resilient businesses with predictable revenues. Management teams should be trustworthy, competent custodians of shareholders’ capital.
Georgina said it was vital that firms managed investors’ expectations during the IPO and beyond. Companies should avoid missing forecasts at all costs and that beating expectations, as opposed to underperforming against expectations, was of the utmost importance. Financial projections should be set conservatively.
Contemplating an IPO is a very important moment in a corporate’s life – as well as to the individuals involved. We really care about that, and we respect it.
Tim Smith, Chairman of Cranswick plc, explained that public companies are more tightly governed than private firms and that management teams should expect to be scrutinised by shareholders. Daksh advised entrepreneurs to put aside any reluctance to work with non-executive directors (NEDs). He explained that NEDs with listed company experience are often helpful to founders. Those with IPO experience are likely to prove particularly valuable.
The board of a listed company exists to protect shareholder value by supporting – and at times criticising – the executive team. Effective boards should comprise a balance of executive and non-executive directors from different backgrounds to serve on various board committees. Georgina warned that a hastily formed board could put-off potential investors. She advised companies to appoint new directors well before the execution of the IPO.
Effective boards are ones that are transparent and communicate clearly, with no nasty surprises. Board packs should contain enough information to make decisions without being overly burdensome. There was broad agreement that the most effective non-executive directors are prepared to engage with the business beyond the boardroom.
Michael Ansell, a partner at remuneration consultant, h2glenfern, said that remuneration was a potentially complex subject that companies must address before going public. This will likely mean a more formal, structured approach that aligns executives with shareholders. Private firms should consider forming a remuneration committee 12 months before a potential IPO.
Remuneration policies will be scrutinised by all stakeholders. Timely and transparent disclosure will help boards minimise potential controversies and build trust with key stakeholders.
How Investec can help
Jonathan Arrowsmith, Investec’s Head of Investment Banking, highlighted Investec’s distinctive culture. “As a founder-led business, Investec operates with an entrepreneurial perspective that sets us apart”. Broad experience and deep expertise help Investec steer companies through every stage of the IPO journey, from the first exploratory conversation to full-service brokerage.
Many companies prefer to test the water before making a commitment. Investec can introduce firms to a select group of potential investors, using the feedback to shape any future transaction. Issues often considered at this stage include the percentage of the company to be listed and the total amount of money to be raised. Positive feedback could be a green light to a full IPO. Negative feedback at this stage comes with a limited cost and could be an opportunity to reflect and reposition the investment case.
Finally, Investec can also play a critical role in helping companies establish their IPO valuation. Typically, valuations are based on a multiple of current-year earnings and a peer group comparison. A good broker should encourage conservative forecasts to minimise any potential IPO discount and to allow the potential for earnings upgrades later in the cycle.