WHEN is an IPO not an IPO?
Well, actually, in the case of smaller AIM listed companies it’s probably most of the time. London Stock Exchange statistics for AIM IPOs show that you have to go all the way back to 2012 to find a company that came to market as a genuine IPO and in the last ten years you can comfortably count the total number on your fingers.
But hang on, “there have been plenty of AIM floats”, I hear you say. In fact nearly a hundred companies have come to AIM since the beginning of 2014.
The point I’m making though is that not one of these actually had an Initial Public Offering in the true sense, that is, where the offering was made to the actual public.
In each instance the initial offering is in fact a private placing of shares available only to a select group of professional investors.
The first time the public can buy shares is once the IPO money has been raised and shares begin trading, but then they have to pay the “market price”.
The same thing can be seen in secondary fundraisings. Poor old private investors have to sit on the side-lines and see money being raised, often at a discount to the current market price, and their holding diluted by the issue of further equity.
As I’ve argued before, private investors are the people who drive a share price, so why are they so regularly excluded like this?
Growing companies often need access to cash, and they need it fast.
With a private placing a few key fund managers can be approached quickly and they have the ability to write big cheques in short order.
No need for a general meeting, no need to produce a lengthy shareholder circular, no need to rack up additional lawyers or registrars fees, no need to risk the embarrassment of private shareholder apathy if an Open Offer is not taken up.
Many private investors might accept this, particularly if the money is being raised to fund something delivering clear shareholder value, but the problem comes when private placings are done at a heavy discount.
A small discount of five per cent might be easy enough to stomach, but if fundraisings are done at discount of more than 10 per cent then I would suggest companies have a moral obligation to make this offer to all investors.
I realise that private investors lack the financial fire power of the institutional investors, and so I’m not advocating that all fundraisings should be an Open Offer, but a combination of a Placing with an Open Offer is an effective way of raising the full amount needed and at the same time treating all shareholders fairly.
Is it really more expensive? Depending on the size of the offer the cost of capital for an Open Offer can often be much lower than placing commissions.
But, with much of the additional cost fixed upfront, companies need to ensure that the Open Offer is significant enough to be worth it, and back themselves to present an attractive story that will be fully subscribed.
Does it take much longer? All-in-all an Open Offer only really adds on extra three weeks to the whole process, so not a huge time delay.
One argument I’ve heard against the use of Open Offers for smaller companies is that it takes willing buyers out of the after-market, whose buying pressure would otherwise push the share price up.
Of course, this argument identifies the value of private investors as key marginal buyers, and reinforces the imperative for smaller companies to recognise this as part of the fundraising process.
If an Open Offer is marketed well it can encourage new and existing investors to buy shares to qualify for the Open Offer and this will ensure that companies have a supportive and loyal shareholder base across all types of investors.
Not many City advisers can claim to have been a Vatican DJ and the first and (probably) last person to play Jimi Hendrix on Vatican Radio.
Mr McManus began his career as an English voice broadcaster for Vatican Radio in Rome before joining Binns & Co.
In 2009 he founded Walbrook PR, which provides financial PR and investor relations advice to smaller growing companies. Walbrook advises over 65 small cap and AIM listed companies valued from £5m up to £250m including Yorkshire-based companies like Animalcare, Avacta, Getech, Filtronic, Mobile Tornado, OptiBiotix and Renew Holdings.