Even the most diehard optimist in the City would admit that IPOs have had a mixed press this year.
Yes, there have been successes, such as Jupiter Asset Management and Betfair, the sports betting company. But most of the attention has focused on dire IPO performances from the likes of Promethean, the maker of interactive whiteboards, and Ocado, the online retailer – so much so that you might think the acronym stands for “invitation to public opprobrium” rather than the more mundane “initial public offering”.
All this has led to many institutions treating IPOs with caution, if not downright suspicion. One leading investor has been reported as saying he will never invest in an IPO previously owned by private equity – which, if true, rules him out of an awful lot of potential investments.
Although his view may be extreme, it is true that IPOs are not easy in this climate – as shown by the decision by Prime, the UK healthcare property firm, to pull its offering in November. Sadly, from a broking perspective, the acronym is coming to stand for “inability to persuade others”.
If all this discord does not go away, everyone could lose out. The momentum and liquidity of London’s equity market depends on a steady flow of new, high-quality growth businesses. Every year, businesses leave the market by the score through takeovers, restructurings, take-privates and, occasionally, by administration or receivership. If they are not replaced, the pool of potential investments will shrink, returns will diminish and liquidity will fall. Also, broking and corporate finance fees might reduce.
So what has gone wrong and how do we fix it?
In the UK, Seymour Pierce has brokered 2010’s most successful IPO – that of Supergroup, the fashion retailer, whose shares now stand at a premium of more than 150 per cent to the float price.
Given that the next year, at least, is likely to remain difficult, and in the hope of injecting a bit of colour into the cheeks of the management of any company thinking of raising money for the first time in the public market, here is a (very brief) back-to-basics guide to a successful float.
An IPO is, in truth, the best corporate finance instrument ever invented, thanks to its enormous flexibility. It allows investors in a private business to cash in some of their previously illiquid holdings without cashing out entirely. In some circumstances, they can even retain control of the business, provided they put in place the proper governance mechanism. It also allows a business to raise development capital at the same time and open up a conduit for future capital raising. It strengthens the commercial standing of a business and allows it to attract and incentivise staff with options and equity grants. What other single instrument can achieve even half of that?
To do all this, though, several ingredients are needed. The first is a powerful structural growth story. Equity is risk capital – don’t ever forget that. Although there are strict rules about promising or predicting the future, investors back IPOs on the basis that they are buying tomorrow’s businesses at today’s price. Many of this year’s crop of IPOs seemed to sit on the wrong point of the risk/reward curve – or perhaps they were simply unable to articulate the potential rewards properly.
The second basic ingredient is a strong management team; brokers are not magicians. Any IPO team needs to have the right combination of enthusiasm, experience, credibility and commitment, and bring these across in a bruising road show.
Then there is the advisory team. These days it is fashionable to hire many advisers for an IPO, just to be sure – but this may often be counterproductive. There can be too many cooks in these affairs, squabbling over their roles and responsibilities and then deciding that the buck stops nowhere. Unlike in other recent IPOs, Seymour Pierce was the sole sponsor and bookrunner for Supergroup. That meant it was 100 per cent responsible and dedicated to its success – and took all the rewards.
Finally, a realistic valuation is critical. In the case of Supergroup, it was discussed at the outset and kept under review during the process – from the perspectives of the performance of the company, its publicly quoted peers and the retail sector generally – before finally being confirmed with the company prior to meeting investors. The IPO valuation of £395m ($614m) equated to a price/earnings ratio of roughly 15 times its forecast profits before tax, only a slight premium to the rest of the retail sector, which at the time was trading at about 12 times, and well below the multiple on which Asos, a rival online fashion retailer, was trading.
Perhaps, with hindsight, other advisers might have tried for more. But then they might well have failed. Seymour Pierce’s valuation ensured the IPO backers would profit from their confidence in the business, while Julian Dunkerton, chief executive of Supergroup, and his management team have seen the value of their remaining investment rise substantially.
When owners and brokers recognise that IPOs are the beginning of an ongoing relationship with new owners, and not an end in themselves, the market for new issues will improve.
The writer is a director at Seymour Pierce and was named Corporate Financier of the Year 2010 by the Institute of Chartered Accountants in England and Wales