IPO lead

Changing fortunes

16 February 2015

The IPO market has sprung back into life with a wealth of businesses listing on the London Stock Exchange

In the first three quarters of 2014, there were more than 100 Initial Public Offerings (IPOs), raising around £16 billion in funds. It is safe to say that the IPO market has finally jolted back to life, with activity up significantly on 2013, not to mention previous years.

IPOs are susceptible to market conditions, and it is almost inevitable that if international stock markets are doing poorly, the IPO market will suffer as a result. After years of a faltering economy, there has been a clear recovery in the UK and thus, the IPO market. The London exchanges have outperformed fellow European markets as doubts over the recovery of the Eurozone continue to persist. Indeed, London is only second to New York in terms of capital raised in the first nine months of 2014.

Investor confidence is at a high as is the quality of assets coming to market in the UK. 

“The equity market is one of the main drivers of IPO activity and the global recession had a huge impact on all IPO markets. Equity markets have started recovering from the crisis and that is reflected in the IPO market,” explains Dr Ufuk Güçbilmez, Lecturer in Accounting and Finance at the University of Edinburgh and co-author of ‘IPO waves and hot markets in the UK’ published in Handbook of Research on IPOs (Edward Elgar). “The improvement of economic conditions means that we have seen an appetite for smaller firms on behalf of investors. Typically IPO firms are relatively small, so if investors have an appetite for such firms, then it helps the IPO market. The UK market has definitely been re-energised this year.”

Investor confidence is at a high as is the quality of assets coming to market in the UK. Equiniti, which provides expert advice and support to companies as they take their first steps to becoming public, has recently assisted on a number of particularly successful IPOs, including the Royal Mail and JUST EAT, which entered the High Growth Segment of the LSE. Equiniti has dealt with a third of IPOs that have come to market in 2014 as well as supporting 66% of IPOs in the areas of Registration Services, Employee Services, Investor Analytics and Company Secretarial Services.

In addition to retailers and technology firms, Dr Güçbilmez also notes that there has been a trend towards media companies coming to market. “I think it maybe follows the US because there were quite a few social media IPOs there including Facebook, Twitter, LinkedIn – they’ve all gone public,” he says. “This is a new industry because you wouldn’t get this sort of firm in the past so it’s opened up the market. We’ve also had the usual suspects, such as financial firms and tech companies. London is one of the strongest financial centres in the world, so it attracts IPOs of banks and trusts.”

It’s still typical for technology firms to go public when they are not profitable because they are essentially selling a prospect. 

The UK saw a solid pipeline in 2014, but the first quarter of 2015 may be weaker. “In 2014, the FTSE All-Share didn’t do so well and this may have a knock-on effect on the IPO market in 2015,” says Dr Güçbilmez. “It might be a slow start to 2015 for two reasons: first quarters are seasonally a bit weaker, and secondly, this year’s stock market performance hasn’t been great. But if there is strong performance in FTSE All-Share or a similar index, it can quickly change. It relates to the resilience of IPO markets to market conditions. If they are strong, you are looking at a strong IPO market as well.”

As such, market conditions, including the seasonality of the IPO market, can determine the right time for a company to float, although for larger companies it is less of an issue. “For smaller companies, it depends on the appetite of investors,” says Dr Güçbilmez. “It’s still typical for technology firms to go public when they are not profitable because they are essentially selling a prospect. But if a small business is considering going public, they must ensure there is enough appetite in the market, and they are either profitable or close to being profitable.”

Activity on the IPO market today is still not on a par with the exceptionally lucrative years of 2000 and 2004 when around 300 companies floated; yet 2014 was a welcome change of pace in comparison to preceding years and perhaps it intimates what is to come in the years ahead.

“If you look at the past 20 years, there were two very good periods,” says Dr Güçbilmez. “One was in 2000 before the bubble burst. It was mainly tech firms that went public. Another good period was from 2004–06 when there were about 200–300 IPOs per year. This time it was more natural resources companies, so for example oil and mining companies, coming to market. At the moment, the IPO market is not as hot as those years, but if you compare it with 2009 and 2010, it is looking promising.”

What next? 

Chris Stamp, Director of Prism Cosec, tells EQ what a business should expect after an IPO

When we speak with management from companies which are contemplating an IPO about life after admission, there are two key words that we mention – compliance and communication. Whilst the central figures in the IPO process will be the Chief Executive and Chief Financial Officer, the managers responsible for compliance (usually the General Counsel or Company Secretary) and communications (Head of Investor Relations) will not be far behind in terms of workload and responsibility. The board of directors, which itself is usually going through significant change in the run-up to an IPO, will of course be ultimately responsible for compliance and communications but for the management teams, these two areas cover the biggest area of change between the pre- and post-IPO environments.  

When a business goes public, it needs to be more transparent than ever before. 

Before the IPO goes ahead, the advisers, particularly the Sponsor and the company’s lawyers, will ensure that the Prospectus complies with all of the relevant regulations and that the Board and management are clear on their legal and regulatory responsibilities. The key, however, is to ensure that procedures and processes are established to ensure that the issuer continues to comply with those requirements. This has been demonstrated clearly in recent FCA notices and judgments which have focused on the lack of process when implementing such things as policies on inside information and share dealing by directors.

When a business goes public, it needs to be more transparent than ever before. Reporting, which particularly at year-end is governed by significant accounting, legal and disclosure requirements, has to be well executed, and the key here is to plan early and clearly. For AGMs, it is best to be prepared for all eventualities and in particular, a large shareholder base needs good event management. The Board must always have a good understanding of who their stakeholders are and what their expectations are. It’s vital to have an open dialogue with investors and you should find as many opportunities as possible to interact with them and keep them informed, for example use conference calls, webcasts and site visits. It is also important to establish a specialised Investor Relations website with financial information, press releases, management and board information, and disclosure policy. 

The journey of an IPO

IPOs can be a very challenging time for a business, but Equiniti can help every step of the way.

Pre IPO
Corporate Re-organisation
Businesses should receive advice on corporate governance, housekeeping and company secretarial support.

Investor Relations
Businesses should use peer group analysis and prepare a prospectus to target investors.

Employee Incentivisation
Businesses should consider which employee and executive schemes to put in place, for example SAYE and SIP.

IPO Launch
The Launch
Businesses can get assistance with regulatory and legal documentation and IPO processes.

Shareholder Analysis
Businesses should set up an investor database and use market surveillance and real-time online data to track shareholder activity.

Post IPO
Registration
Businesses should put a registrar in place to run AGM management, dividend payments and shareholder communications.

Employee Benefit Solutions
Employee and executive share plans should then be launched and Equiniti can help with the management and trading of these.

Company Secretarial
Company secretarial support needs to be put in place to assist with board governance and policies, annual reports and disclosures, and compliance procedures.

Corporate Actions
Equiniti can provide support for capital structure re-organisations, including Secondary Fund Raisings.

HR/Process Outsourcing
Businesses may consider outsourcing their payroll management, contact centre, pensions admin, customer services and flexible benefits.