Following a five-year lull, there’s no doubt the IPO market has returned to some degree of normality with household names such as the AA, Saga and TSB joining the stockmarket in recent times. A good few of these have delivered attractive returns (investors in Direct Line’s 2012 IPO have more than doubled their money in less than three years) although AIM in particular has had its fair share of duds. A well respected fund manager I know simply will not look at IPOs as he believes the odds are too far stacked against him.
Given this backdrop, how can companies looking at joining the stockmarket give themselves the best chance of success? Experience tells us the best approach is to maintain flexibility and regard the IPO as the start of a journey, not the end. Balancing conflicting interests of new investors (who want to buy at the lowest price) with existing (who will want to sell at the highest price and reduce dilution) is as much an art as a science.
A good corporate broker will be invaluable in managing this process but suffice to say you shouldn’t expect the highest possible valuation on Day One. Investors will quite rightly expect you to earn your rating by keeping your word and delivering on expectations and this trust will take time (often measured in years) to build. Short of criminality, the worst offence a management team can commit is to over-promise on IPO and then under-deliver. The road back from an early profit warning will be long and tortuous and may ultimately see you out of a job.
Investors’ goalposts can and do change even during the marketing phase so flexibility and compromise are key. If, for example, bad news has emerged in your sector or investors go “risk-off” due to a macro-economic event, then appetite (and therefore the price they are willing to pay) will be affected.
Finally, do not underestimate the time and effort required to successfully navigate the IPO process. Pretty much the shortest timeframe an IPO could be completed is 12 weeks and it is often significantly longer. The more preparation and planning, the better. Mandatory paperwork such as the admission document, working capital report and of course the dreaded legal verification will all be required even before marketing to investors can commence. Checking other documents such as the analyst research report and investor presentation will also consume time.
When the marketing phase commences, make sure that the pitch is concise and well rehearsed. At busy times of the year, fund managers will see at least half a dozen companies a day and there will often be competition for a finite pool of cash.
You should be able to get the message across in 30-40 minutes allowing a further 15 minutes for Q&A. One of the worst things that can happen in a face to face meeting is getting bogged down in irrelevant detail that leads the conversation down a blind alley and wastes time. You will also likely be living out of a suitcase. It is not unusual to have in excess of 40 meetings over a two week period.
Provided you are prepared to take on the responsibilities of the process then the second half of 2015 could be the perfect time to look at an IPO. The current market could probably be characterised as a scene from Goldilocks, i.e. not too hot, not too cold. A few flops have made investors cautious but set against that is a wall of money looking to invest in good quality companies offered at reasonable valuations.