Investec 2021 IPO conference: Event summary

At Investec’s latest IPO conference and the first to be held virtually, we heard some timely advice and insight from our speakers. The main message? With the market so buoyant at the moment, put your best foot forward, immerse the right personnel in the process and have clear metrics.

Investec’s Co-Heads of Corporate Broking & PLC Advisory Carlton Nelson and Bruce Garrow discussed the current market dynamic, which has demonstrated resilience in the face of Covid-19 disruptions. Many companies have raised capital to offset the disruption and strengthen their balance sheets. Significantly though, Garrow highlighted that following the initial wave of fundraises to support balance sheets, a lot of companies had raised capital to fund growth.

IPO activity in the year to date has been significant. To date, there have been 13 small/midcap IPOs raising c.£4 billion. To put this into perspective, this is the highest amount raised in the last four years, despite only being a half year total.

Additionally, share prices across all sectors, apart from aerospace and defence, have increased since the initial outbreak of Covid-19 in March 2020. Garrow mentioned that fund managers will be looking for exposure to all sectors after predominantly good performances. But how do emerging companies looking to IPO ensure they are best in class while operating in a competitive market?

“Think about the long-term not the short-term. Don’t think about the valuation on day one, think about your valuation you will get over time with consistent delivery against appropriate forecasts.” 

Due to the influx of companies beginning the listing process, the importance of businesses being differentiated is ever more pressing. Investec Co-Head of Corporate Broking, Carlton Nelson, said: “Investors are looking for interesting businesses that are differentiated, have momentum, have a certain size and liquidity and a management team with a great track record.”

BlackRock senior fund manager Roland Arnold, who focuses on small to midcap investing, concurred: “Market positions can be quite narrow. We will look at the specific market in which you (the business) operate in and decide whether you are leaders within that market and over time your market exposures will grow and hopefully your share price and profitability will grow. We will continually reassess where you sit within those markets.”

Nelson emphasised the importance of emerging business owners portraying their business as a public company in advance of an IPO. “Make yourself walk and talk like a public company. You can do small things such as putting your financials on your website so investors can get used to the business and the cash flow model. Investec is keen to work with companies on how to position themselves for investors."  

Nelson discussed the importance of ‘pilot fishing’ in the process. ‘Pilot fishing’ is a type of pre-marketing of an IPO that involves sounding out investor sentiment and receiving feedback on how the market may respond.

Nelson expanded on this by saying: “We usually speak to around 15-20 fund manager across two or three days. They will give us detailed feedback which can help hone the investment case.  They can also support the business and the IPO early on with an indication of a cornerstone investment but primarily will provide a clear indication of whether they would invest when it comes to market and at what valuation.” This test marketing stage takes a degree of the risk out of the IPO process and is typically conducted before money and time is spent with lawyers and accountants.

ActiveOps CEO Richard Jeffery, who recently undertook the IPO process in March 2021 with Investec advising, agreed and valued the importance of the ‘warm-up process’. This includes the ‘pilot fishing’ exercise, but Jeffery also picked out the helpfulness of a capital markets day during the IPO process and the pre-deal investor education meetings performed by the equity analyst: “These are all incredibly useful, they help you pick out the things you want to talk about in the IPO investor meetings, as all the technical information and detail has been given already.” 

BlackRock senior fund manager Roland Arnold outlined some key lessons relating to valuations for businesses looking to float. Arnold emphasised the importance of being accurate when valuing your company: “You should under promise and over deliver. Don’t set aggressive forecasts, they won’t get you a higher valuation and no one will believe them anyway,” said Arnold.

In addition, Arnold recommended business owners consider the ‘IPO discount’. When businesses are looking to IPO, they are competing for investment with already listed companies. Investors will have an abundance of knowledge on the listed companies, as opposed to just three years of performance for prospective businesses. That lack of experience on the market results in an ‘IPO discount’ and consequently, this ensures a competitive valuation in a market where investors have to make difficult decisions when dropping a company in their portfolio to accommodate a new investment.

Arnold concluded by stating “Think about the long-term not the short-term. Don’t think about the valuation on day one, think about your valuation you will get over time with consistent delivery against appropriate forecasts.” 

"The CEO and FD will be consumed with the IPO process for a significant period. You’ll need to plan and organise accordingly, including controls and approvals to protect the BAU."

Jeffery shared another of his key learnings from the IPO process. This centred on the internal personnel involved: “The CEO and FD will be consumed with the IPO process for a significant period. You’ll need to plan and organise accordingly, including controls and approvals to protect the BAU (business as usual). Dedicate an internal team to support the process and try to minimise the individuals involved in both BAU and the IPO process.”

From an investor perspective, Arnold highlighted the importance of having a small number of advisers involved with the process: “Big [investment bank] syndicates are a red flag. If there are too many people/analysts/brokers involved it will put investors off. Choose one or two brokers that offer something different.” 

With over $1 trillion worth of assets signed up to the Principles for Responsible Investment network, including nearly all major UK institutional investors, ESG is increasingly becoming a big theme across the public markets. Investec's Head of UK ESG Equity Products Alicia Forry outlined both the positives and implications of an emerging business creating a strategy with ESG in mind: “It’s no longer an optional exercise, it’s a must. If we look ahead, regulation is looming and that will require all UK companies to report on their climate risks to business and set targets. And ESG has the ability to derail an IPO process now, whether that’s through workers right or governance.”

Indeed, Richard Jeffery agreed that post-IPO, he was surprised at the level of activism regarding ESG.

Forry concluded by offering some advice for businesses embarking on adjusting their ESG goals: “You need to assess your current ESG position and realistically focus your efforts. Organise your team – who will be in charge? Get someone on the board to champion this. Set achievable but ambitious targets. And finally, manage your time. It takes time to develop a strategy, so build adequate time into your IPO timeline.”

The Restaurant Group has been listed since 1969. CFO Kirk Davis gave some valuable insight into life as a listed company and picked out the importance of maintaining good relationships in life post-IPO.

“It’s really important to foster a positive relationship with sell-side analysts and the media. When it comes to analysts there can be multiple depending on your sector. This is where it pays to have one point of contact, whether that’s your CEO, financial director or head of investor relations. Again depending on the sector and your business, this will determine the importance of media. Typically it will be a half-day of calls on the day of our financial results with the aim the key messages hit the wires. That said, journalists will always try and find an angle where they can, so you may not get the headline you were looking for!”

While the process of listing may be many months of intense process, floating on the London Stock Exchange is just day one of being a public company. Davis discussed how being a listed company helped with the recent Covid-19 disruption:

“We’ve had to respond proactively to the tough conditions. Early in the pandemic, we went to shareholders for support for liquidity. We were provided with £57 million of cash, which helped our business which was burning through £5 million per month during lockdown. We again raised £175 million in March 2021 from existing and new investors from the UK and overseas. This enabled us to achieve objectives: ensuring sufficient liquidity against Covid and giving us funds to accelerate growth in acquisitions.”

Davis also mentioned the regulatory benefits of listing in London. “The London Stock Exchange gives you access to capital across the globe. As it has a reputation as a first-class regulatory environment which gives the investors confidence that your company qualifies for the corporate standards required to access this club.”