The UK possesses an array of young, innovative businesses with management teams that have refreshingly bold plans for the future. Finding traditional forms of finance to support these ideas and ambitions remains a challenge, which is one of the reasons why companies continue to weigh up the risks and rewards of becoming a publicly-listed entity.
Mark Fahy, Head of UK Small & Mid-Cap Companies for Equity Primary Markets at the London Stock Exchange, says: “We have never had as many meetings with UK companies as we’ve had this year. It has in part been driven by the need to access finance and the lack of availability of debt finance for various reasons within the banking sector. It is really important that we educate companies about the benefits of flotation, either on AIM [the Alternative Investment Market] or the Main Market.”
Executed properly and with the appropriate access to capital, a public listing can dramatically accelerate growth. Robert Drummond, Chairman of Acta, an AIM-listed renewable energy business, says: “The great thing about being a listed company is that if you are doing well and have opportunities, you can raise funds and use your paper for acquisitions and grow a business far faster. I have been involved in companies that have used it to great effect.”
By equal measure, for any company considering an Initial Public Offering (IPO), there are lots of questions to be asked about those aforementioned risks. Chris Searle, Corporate Finance Partner for professional services firm BDO, says: “The number of companies coming to market is very slow. The main factor causing this is the ongoing eurozone crisis, which has of course impacted the wider world economy too. It means that just when you think that things are getting better in the market and you might press the button on an IPO, the crisis erupts again.”
It’s worth looking at how companies already listed on AIM, the London Stock Exchange’s junior exchange for growth companies, are dealing with being public in such a twitchy environment. Faisal Rahmatallah, Chairman of the AIM listed Plastics Capital, comments: “At present, I believe the big negative for companies on AIM comes from the lack of institutional interest in businesses with a market cap of under £50 million, meaning that some 600 or so companies are potentially treading water.
“They cannot get sufficient interest in their shares to get a decent rating and without that they cannot raise capital at a sensible price, meaning that acquisitive growth, which used to be one of the key attractions of a listing, is very difficult.”
The debate about investor spreads, in terms of the mix of institutional, retail and other private investors, is a complex one. Clive Ansell, Group Managing Director of Technology for the specialist education concern Tribal, and Non-executive Director of voice recognition company Eckoh (both listed on AIM), says: “With a clear message and a clear strategy, you can get some air cover from investors for backing a company’s growth plan. Nonetheless, getting the support to really grow remains a challenge in this environment.”
According to Faisal, “the only way to escape the ‘small-cap trap’ is to deliver against an attractive organic growth model and to draw in a mix of shareholders, institutions, private client brokers and private individuals that trade in small lots and set the share price day to day. In these circumstances, your rating will improve and facilitate acquisitions.”
Again, getting and defining the ‘right spread’ of shareholders will depend on the company and what the management considerers reasonable (more investors can mean it takes longer to execute on strategy). Robert, for instance, is less concerned about the degree of liquidity on AIM, suggesting that “it is probably better than the other markets that have cropped up and disappeared over the years”, but he does believe there is an issue with banks.
“I’m more worried about the [government] money that’s been thrown to the banks in order to support investment in smaller companies. I think that banks will use the money in ways that suit them and not in ways that suit the economy. Rather than increase lending to small companies, banks have rather cleverly done what good businesses do which is hike prices, reduce their sales and increase their margins, being a lot tougher on terms.”
Clive takes a similar stance, although his frustration relates to the slowness and layers of bureaucracy in getting things done, such as something as straightforward as obtaining bank guarantees. He explains: “What is crucial is banking support for AIM companies and FTSE Fledgling ones, especially as they internationalise. I’m not even talking about debt and bank funding here, it’s just banking support.”
A numbers game
The golden rule when going public is not to miss your numbers. Sam Smith, Chief Executive of broking firm finnCap, comments that “the companies that consistently over deliver on their numbers do get a premium rating in the market and that can really only happen over time”.
Easier said than done, admittedly, but strong management teams will appreciate the importance of telling a story to the market about the journey of the business which is reflected in the numbers. Sam continues: “Under promising and over delivering is probably the key thing you can do at the start of an IPO but also on a consistent and ongoing basis as a public company.
“It’s the way you build up credibility in the market and what institutions will look at when choosing to support you going forward. If you get it right, the institutions will be more likely to back your strategy, give you leeway and that really impacts on your rating.”
Paul Clarke, a Criticaleye Associate and Non-executive Director of investment concern Brookwell, says that the priority for a Plc at the moment is to prove you can deliver the goods. “Your reputation should demonstrate that you will meet or slightly exceed shareholder expectations, in terms of profit performance and information flow, so that you turn up no surprises to the City.
“It also needs to show that it’s run by experts in what it does – if the business is well run, makes a good product or supplies good services, it will exceed those expectations… It’s nice to have a well-balanced board but delivery is really what matters, even if the board is not conforming to the latest norms.”
Provided the business model is compelling and communication with stakeholders is handled professionally, Paul argues that “one can even get away with one profit warning as those who [inform] the market will get the acclaim”.
Sam comments that one profit warning may be forgivable, but a second or third consecutive warning is going to be extremely damaging: “If you are having trouble, do one big profit warning, downgrade and I would say be more aggressive than you need to need to be, and get it out of the way and move forward.”
The right fit
For any company serious about a listing, the input from non-executive directors and advisors can be invaluable in order to navigate the switch from being a private to public company, where mistakes and misfortune are punished with greater severity. Roger McDowell, Chairman of the AIM listed critical components manufacturer Avingtrans, is unequivocal in his view that a “good strategy and high quality management will find the markets supportive”.
So it’s not quite the end of the world for smaller public companies. Paul comments: “The UK is still a good place although there is competition now from other markets. One thing potential companies coming to market must do is not fall prey to the hype from exiting shareholders about the price and the amounts to be raised.
“It’s better to raise a lot more than one thinks one needs at a lower price and be realistic about performance over the first couple of years – Facebook is a prime example of how to be greedy and to mess it up.”
There also has to be honesty about whether the company can fire up the imagination of investors and stand out from the crowd. Chris says: “More specialised companies may get away with an IPO in this environment but they’ve got to have something really special. In these current markets, it has to be different.”
Figures to the end of June show there have been 21 IPOs on AIM this year, raising £150 million, compared to 19 for the same period in 2011 when £247 million was raised (June was busy month). Importantly, institutional investors continue to back companies on the market too, as can be seen by secondary fundraisings, where £1.4 billion has been raised to the end of June, compared to £2.5 billion for the first six months of last year.
The real question is whether confidence in the economy will pick up. If it does, then there are businesses and management teams out there with a good story to tell who can prosper. Marcus Stuttard, Head of AIM at the London Stock Exchange, says: “Companies are universally saying to us that they want to get on with growing the business. They’ve been through 2008 and 2009, paying down debt, strengthening balance sheets and making the necessary cuts. Now they want to get into growth mode.”
Please get in touch if you have any comments about the issues raised here.
I hope to see you soon.
Matthew
Criticaleye 