Angus Thirwell issued chocolate bonds in 2010 to fund Hotel Chocolat. This year he went for the more conventional IPO © Bloomberg
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Handing out chocolate as a reward can only go so far, as any parent will attest. The same is true if you are seeking the kind of increase in funding needed to take the crown of biggest British chocolate brand from the long-term holder Cadbury, says Angus Thirlwell, chief executive of upmarket confectioner Hotel Chocolat.

In 2010, Mr Thirlwell and his co-founder Peter Harris served an offbeat fundraising scheme of issuing chocolate bonds, which paid holders in bars of its cocoa-rich products rather than cash.

This year, Mr Thirlwell and Mr Harris arrived in the City of London to follow a more conventional fundraising route of an initial public offering, listing a third of Hotel Chocolat’s shares on the UK capital’s junior stock exchange, the Alternative Investment Market.

“The chocolate bonds were very successful at raising some capital for our needs in the past,” Mr Thirlwell says. “But we realised that bonds alone were not going to be enough when we want to become the nation’s favourite chocolate.”

Hotel Chocolat’s shares climbed 28 per cent on their opening day, but that sort of success is unusual. The reality is that IPO markets in London and elsewhere have been in the doldrums since the financial crisis of 2008.

The number of listings globally this year is down on the same period in 2015, according to data compiled by Dealogic. During the first four months of 2016 it recorded 330 deals worldwide, with a total deal value of £29.3bn, compared with 487 deals, with a combined deal value of $63.5bn, in the same period a year earlier.

Global uncertainties such as the US presidential election, the UK’s EU referendum and problems in emerging markets are probably taking their toll — the numbers are well down on the 781 deals achieved in the same period in 2007, before the global financial crisis.

For tech start-ups there is the added complexity of “ unicorn” companies, valued at $1bn-plus, who have chosen successive private equity funding rounds instead of the IPO route. This has created valuations not borne out at IPO: mobile payments company Square was valued at $15 a share privately but went public at $9.

This recurred in January, when Gilt, an online flash sale fashion retailer, whose private valuation passed $1bn in 2011, was acquired by Hudson’s Bay Company, the owner of Saks Fifth Avenue, for $250m in cash. If such a company can only achieve a fraction of its private valuation in a trade sale, what hope would there be for a highly valued company seeking a stock market listing, observers ask.

“Right now markets are fairly volatile, particularly in innovation, making it not the most attractive time to list,” Erin Platts, managing director of commercial banking for the UK branch of Silicon Valley Bank, admits. “When we come out of that, I wouldn’t be sure but I wouldn’t think it would be before 2017.”

For Hotel Chocolat, the advantages of being able to raise substantial amounts of capital, as well as access to larger pools of debt than could be obtained from its chocolate bond programme, outweighed the costs of listing shares, according to Mr Thirlwell. The IPO also left the founders with a two-thirds stake in the business, enabling them to continue to shape the company’s direction, Mr Thirlwell notes.

“This enables us to be involved in the business for the long run,” he says.

Once founders accept venture capital, the chances of an IPO do increase as it is a primary method for the backers to realise a return on their investment.

Idinvest, a European private equity manager with more than €6bn under management, is preparing one of its portfolio businesses for an IPO on Nasdaq at the end of June. This is likely to be the only one of its companies to list on the US exchange this year, compared with none last year and one in 2014, but partner Benoist Grossmann says he is happy with this volume of activity.

He is also pleased that many of the start-ups that have listed in recent months are doing so after a decade or more of trading as opposed to the likes of Square, the mobile payments business, which listed shares barely six years after its launch.

“It takes time to build a business,” Mr Grossmann says, claiming that his rule of thumb is for companies to have traded for at least eight years before moving to an IPO. There are no “quick fixes” to preparing a company for a listing, he adds.

Even if the IPO market becomes more attractive, many founders will seek to remain privately held as long as possible.

An IPO is not on the radar for Jake Crampton, chief executive of Illinois-based MedSpeed, a US medical supplies logistics business he co-founded with a fellow MBA student at Chicago Booth School of Business 16 years ago.

For the first decade of its life, MedSpeed grew slowly to an operation with about $17m in sales, so it did not look like an attractive IPO proposition, Mr Crampton notes.

Although MedSpeed has now hit a significant growth spike, with sales forecast to rise from $80m to more than $100m this year, Mr Crampton sees little point in putting himself through the public scrutiny and cost of an IPO when he is able to access enough bank debt to buy delivery vehicles and has sufficient capital from a long-term investor that has been with the business since it started trading in 2000.

There is not one main factor persuading Mr Crampton either way, although he cites the increased scrutiny of quarterly results filings, the added bureaucracy and the cost as cons and sees no upside in the additional publicity an IPO would bring given that MedSpeed’s customer base is limited to a few specialist businesses.

“My goal isn’t to make a company public,” he says. “My goal is to just build a better business.”

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