The following article by Vigo’s Senior Counsel Damian Reece appeared in The Times on Monday, 13 January.
Whisper it, but some City of London shrewdies are predicting a recovery in stock market listings (or initial public offerings, IPOs in the jargon). Brokers at Peel Hunt, for instance, are reporting that investors are more engaged and the market is “selectively open”, with an increase expected from the second quarter.
An IPO is a milestone for any company, whether it’s to heighten status and profile, provide loyal employees with a way of buying and selling shares, or raise growth capital from new investors.
So how do you prepare to become one of those favoured by investors and elevate your business to public company status? Here are some golden rules.
Investors are time-poor. They need to understand your business clearly and quickly. In an IPO you’re selling a story, an “equity” story, and yours must be crystalline and succinct.
Numbers of IPO candidates are still modest, so now is a good time to prepare and get ahead of the competition.
To succeed you will need a great advisory team, people who have been there and done it before. Financial advisers, bankers and lawyers work to get the legal and financial details right. Brokers and communications advisers work to get the story right for both investors and the media. Your reputation is your greatest asset and an IPO can enhance it if managed well. But be warned, the opposite is also true.
In the months, if not years, before you reach the IPO starting line, there is much you can achieve to get your story understood. This will make your first investor meetings much easier. Use industry events, banking conferences, media exposure and your own social and online content to provide investors with a wealth of information they will value in the future.
An IPO process should build on credentials established as a private company, with a compelling equity story for new investors explaining the business model, how you generate revenue and how you make (or plan to make) profits.
It needs to be honest about costs, including investment, because the flip side is margin and that’s what investors want to understand — your margin, its width and how it’s going to grow.
Investors also want to know what differentiates you in the market, and the size and strength of your competitive advantage, while being realistic about the threats and risks. Make clear your growth credentials, while explaining your own management skills. Why should anyone back you as people?
An IPO is a lengthy process, so have an excellent project manager. Some management teams believe a successful IPO is getting through the legals, the audits, seeing shares list and raising new capital. Wrong. An IPO is judged on the subsequent share price movement.
This brings us to IPO pricing. Many are the quality companies that got greedy, priced their IPO too high and embarked on a one-way share price journey south.
As management planning to stay with the business, your interests are more aligned with new investors coming in, not a large shareholder using an IPO to sell out. This is a constant tension in any IPO process and all sides must compromise for it to be a success.
Finally, promises. If you don’t stick to your equity story after IPO, expect to be punished. Markets don’t like surprises and it’s three strikes and you’re out — if you’re lucky.
But get it right and life as a public company can be highly fulfilling; so long as you remember the rules.
