An initial public offering (IPO) is a crucial decision that’s taken by a private company to grow its business.
It can give a company founder or co-founders the opportunity to cash in on their investment, raise money to acquire other firms, allow longstanding investors to exit or expand the business by using the liquidity of the public market.
However, the level of disclosure and scrutiny will be much higher than if you were a private firm.
The best way to IPO
Successful IPOs tend to have a backable, experienced management team. This management team will present the investment case to buy shares in the company impressively well while having a compelling reason to undertake an IPO.
Before you IPO, you must have an established, well thought out, defendable and scalable business plan which includes:
- a good track record of growth
- is operating in a niche sector/one with high barriers to entry
- has genuine innovation or “first mover advantage”
>See also: Flotation: the pros and cons
Which market should I IPO on?
In the UK there are a number of markets that you may be able to float your company on. These include The London Stock Exchange (known as the Main Market), The Alternative Investment Market (AIM) and Aquis.
>See also: AIM to Main: why bother?
How do I value my company for an IPO?
Before you IPO, it’s likely that you’ll already have an idea of how much your company is worth. But when you plan to take your company to market, you’ll work with various corporate advisers, brokers, bankers, accountants and lawyers. As the IPO approaches, the company valuation will be narrowed down as scrutiny becomes tighter.
Your underwriter – the bank which is sponsoring your listing – will create valuation table of your company’s peers to determine your own company’s valuation range and then decide what the valuation premium or discount is compared to comparables.
Remember, valuations on the public markets can be lower than those for private companies. Incoming investors will often expect a newly IPO-ing company to float at a discount to the valuation of their competitors and peers already in the market – mainly due to their lack of on market track record.
IPO process steps
According to a summary of the procedures that an AIM-listed stock went through, an IPO requires the following commitments in order:
- Appointment of a broker and corporate finance team
- IPO preparation (group restructuring, board composition, tax implications of group restructuring and HMRC confirmations and preparation of IFRS accounts)
- One round of due diligence
- Test marketing/presentation of prospectus
- Site visit with cornerstone investors
- Signalling the intention to float
- First day of IPO
Watch the below video on how an IPO works
How long does it take to IPO?
The process can take anything between six months to six years, depending on the overall readiness of the business and market conditions.
Importance of the roadshow
Another key part of raising interest in the listing is a roadshow. This is where the company CEO, finance director and possibly other directors will embark on a company roadshow for around two weeks with five or six meetings a day, where they’ll present a 20-page PowerPoint presentation to attract finance into the business.
Prospective investors invited to the roadshow will have already received a research note that contains the history and information on the company but also have financial forecasts for the next three years, as well as an admission document to the stock exchange, the Intention to List (ITL).
The goal of a roadshow, which involve introducing the company to as many prospective investors as possible, is to try and achieve an oversubscribed fundraising.
However, these roadshows are competitive because investors are seeing six or seven roadshows a day, as well as speaking to existing companies already floated which they own shares in.
Why does an IPO fail?
The most common reason for failing to get an IPO off the ground is not being able to raise the money you need.
This risk can be mitigated by undertaking “early look” test marketing to institutional investors to see if there’s appetite. This kind of test marketing will help the founder and advisers to make the investment case even more compelling and refine the message to appeal to institutional investors.
Sometimes it’s the market, not you
Even if you have a convincing story and your financials add up, your IPO can still flop for reasons beyond your control. Sometimes the investor appetite is just not there, period. The UK stock market is on course for its worst year in a decade as listings grind to a halt amid soaring inflation and a depressed market.
Only eight IPOs took place on the London Stock Exchange (LSE) between July and September, raising just £565m, according to EY.
This represented a decline of 76 per cent in the volume of listings and an 86 per cent drop in cash raised compared with the same period in 2021 as spiralling inflation, the war in Ukraine and rising interest rates.
Meanwhile, the situation on AIM was even worse, with the junior market experiencing its lowest number of IPOs for one quarter in 13 years between July and September (Q3) this year, with just one company listing.
Research conducted by national accountancy group UHY Hacker Young found just £3m in new equity was raised during the quarter, which was significantly lower than the same period last year (£468m).
Colin Wright, partner and chair of UHY Hacker Young, said the period of “market turmoil” had made it difficult for any business to successfully IPO.
He said companies that were preparing to list would have “been forced to hold off until the current volatility subsides”.
As a result, many businesses have delayed their IPO plans until they believe inflation has peaked and stability returns to the market.
If demand is low, should I postpone the listing?
Valuation expectations can lead to IPOs failing. Although the funds may have been raised, shareholders may not be satisfied with the valuation and choose to cancel the IPO.
Similarly, market conditions can sometimes turn against a sector (such as retail/consumer recently), which will make an IPO in that sector challenging to achieve at the desired valuation.
When The Hut Group floated on the LSE in 2020 with a £5.4bn flotation, it was the biggest London IPO in years. Four cornerstone investors, including BlackRockk, the Qatar Investment Authority and Janus Henderson backed the company’s vision.
Since listing, its market capitalisation has fallen from £5.4bn to £2.5bn, despite raising $5bn in extra equity in May.
Founder Matt Moulding has blamed an almost coordinated swarm of investment banks, fund managers, hedge funds and media all working together to collectively drive THG’s share price down, so they can cash in on having bet on a falling share price, he argues.
Investors however have had subsequent doubts over the valuation of THG’s tech platform division called Ingenuity Commerce, which underpinned the investment case for the whole group with valuations giving it a premium over Shopify.
Founder Matt Moulding told GQ magazine that he should never have listed THG in London and that the experience “has just sucked from start to finish … And there hasn’t been a positive day since IPO, or even announcing the IPO”.
A successful IPO
One example of a IPO that has gone well is Kistos, a low-carbon energy producer, which listed on AIM in November 2020 at 100p a share with a valuation of £201m and is today valued at £436m. It is now trying to buy a larger rival and hopes to list on the Main Market.
High wire act
Undertaking an IPO is a complex, at-times high wire act which can test the resolve of any founder but if you get it right you can look to see a healthy return on your investment in your company, a wider pool of money to use to expand your firm, and a greater reputation across the UK.
Or, as THG chairman and chief executive Matt Moulding put it, accessing capital “in a private arena is tough. Raising a hundred million in a private arena, it can take you six months. You can raise a billion in the public markets in 24 hours”.