Simon Holden, an associate in the London office of international law firm Faegre & Benson, analyses the situation.
The past two years were testing times for those of us who work in the public markets, with record numbers of insolvencies and companies delisting from the UK’s stock exchanges to conserve the little cash they had left.
In stark contrast, 2010 has begun at the opposite extreme. Investment banks, facing less competition, have been able to charge an even greater premium for their services, and are announcing substantial profits. So has this cash flowed back into public companies and, if so, is it being felt at the smaller end of the market where it is needed most?
At a cursory glance, it would appear so. At the time of writing, a number of significant initial public offerings (IPOs) have been announced. The most eye-watering of these was the proposed flotation of Travelport, owner and operator of the world’s largest travel agent booking system, which was looking to raise more than £1 billion. However, its owner, the private equity behemoth Blackstone, has since pulled the IPO due to a distinct lack of support from London’s investor community for the company’s valuation.
Advisers and commentators alike wondered if the Travelport IPO would be a sign of things to come – a return to the feeding frenzy enjoyed by investment banks as they secured lucrative advisory roles. On the back of Travelport, a batch of other companies also announced their intention to float, including New Look (the high street fashion chain) and Merlin Entertainments Group (owner and operator of Sea World and Legoland, amongst other attractions). However, as hot as these companies were on the heels of Travelport to declare their intentions, they followed in rapid succession in withdrawing their IPOs.
An interesting common denominator for these companies is that they are all backed by private equity groups and interest repayment dates are fast approaching. Fund managers are baulking at the suggestion that they should back these companies now, when it is clear that the private equity groups are looking to sell stakes primarily to pay down debt (which was partly incurred to reward themselves with significant dividend pay-outs).
The much heralded return of the stock market’s glory days may be still to come, but at the smaller company end of the market, there has been a distinct uptick in activity. January saw three admissions occur on AIM, all by way of re-admission to the market. Whilst not necessarily good indicators in themselves of the availability of capital for smaller companies, they provide plenty of optimism. Better cause for celebration occurred earlier this month, with completion of the IPOs of Oxford Nutrascience Group (raising £1.1 million) and Kea Petroleum (raising £6 million). Whilst the sums secured by these companies are relatively small, they raise hopes of greater things to come.
The recently pulled IPOs at the larger end of the market would seem to indicate that any optimism should be tempered with a good degree of caution. Nevertheless, the recent flotations on AIM, a flagship for the smaller quoted company scene, lends credence to the notion that capital is increasingly available for ambitious, growing companies.