Posted on Wednesday 21 September 2016 by Ulster Business
By Kevin MacAllister, head of PwC’s Assurance practice in Northern Ireland
A combination of a slowdown across the Eurozone and developed markets, together with the recent referendum result to take the UK out of the EU, has depressed financial markets and hit confidence. However, there are already signs that a recovery is fueling growing confidence and that the impact is likely to be short-term, so companies should be preparing to use public markets to finance their post-Brexit expansion and growth.
Whatever the strength and availability of bank finance, private equity and even crowdfunding, accessing capital markets is a key to driving continued private sector growth. We are currently punching well below our weight compared to other UK regions, yet there are a plethora of companies in Northern Ireland which could access public equity.
Back in May 2012, Facebook raised $16bn in new capital in less than a day of trading through its initial public offering (IPO) and there is a perception – particularly amongst Northern Ireland’s small family-owned businesses - that accessing capital markets via an IPO is the personal preserve of the big battalions. But, IPOs are not just for the mighty US tech companies, the little guys can do it too.
UK-based companies which have floated so far this year include Hotel Chocolat, the clothing brand Joules and the listings and city guides publisher Time Out. All three opted for IPOs in a depressed market and ahead of the Brexit vote and all three achieved their target valuations, with both Hotel Chocolat and Joules shares still at a premium at the time of writing.
It’s worth remembering that an IPO offers more than money. Public Limited Company (PLC) status confers considerable prestige and there’s a cache attached to the status that does not extend to private companies. PLCs can find previously closed doors more easily opened, previously reticent customers more willing to deal and more skilled and experienced non-executive directors willing to serve.
PwC believes the markets provide an opportunity for Northern Ireland to grow. But that means local companies need to be confident in their ability to access the market and be knowledgeable in the opportunities it could bring.
Northern Ireland once had six publicly-listed companies, now it has two
Northern Ireland once had six active, publicly listed companies.....recently this has reduced to two. But that fact that Northern Ireland has only two remaining listed PLCs is not reason why it can’t have more. Particularly when, over the past five years, Scotland has had 10 IPOs, Wales 11 and even the Isle of Man saw its five IPOs raise close to half a billion pounds in new capital.
One major obstacle to persuading more Northern Ireland companies to embrace IPOs is a fear that going public risks diluting family control and encouraging ‘new’ shareholders that their views should be sought in day-to-day business management. There’s also a perception that listing and running a public company is cumbersome and expensive, while the ‘Facebook syndrome’ suggests that only the biggest, mega-growth businesses should even consider an IPO. In reality, in the current climate, with an abundance of institutional equity, sparse returns and virtually zero interest rates, steadily yielding companies are increasingly attractive.
An IPO offers flexibility compared with other forms of capital raising
For a company, an IPO can offer great flexibility compared with other forms of capital raising. A bank may only lend money secured against assets such as property which can be sold if the company were to fail. But many small and growing companies may not have enough security to offer. They may also not be able to manage the interest payments on such borrowings, particularly in the early years and secured bank finance is not risk money. That’s where the IPO comes in, providing the ability to raise capital for expansion, funding for acquisitions and even offering new investors the opportunity to do all that while taking some reward for the effort and expertise already invested.
Mind you, PwC’s most recent publication IPO Watch would not necessarily cause local companies to run out to seek a listing. The run-up to the EU referendum put the brakes on a number of anticipated IPO and we expect that European IPO proceeds are unlikely to exceed €25bn by the end of 2016, less than half of the £57.4bn raised in 2015. It was feared that the UK vote to leave the EU would be met with a series of cancelled and postponed IPOs but, in practice the level of publicly postponed and cancelled deals was in line with previous quarters. That said, the majority of companies pursuing IPOs for the second half of the year are maintaining their plans.
However, the timeline for achieving a listing from initial discussion to execution being a 12-18 month window makes the current reality less important and the forecasts for 2017/18 more relevant. So, despite the headlines, Northern Ireland has some excellent innovative businesses across the traditional sectors of manufacturing, construction, aerospace and agrifood, as well as the newer kids on the block in technology and pharma that are market-leading on the national and international stage. These businesses and the future heavyweights that are striving to reach these heights, need an environment to grow and prosper and the availability of funding to help them grow will be a key component over the coming years of nervousness and uncertainty.
Clarity over EU negotiations will be key to IPO activity recovering
Improved political stability and greater clarity over the UK’s progress on negotiations with the EU will be key to IPO activity picking up again, post the traditional quiet summer period. Provided this is the case, the successful completion of the first IPOs coming to market post-summer will set the tone for the remainder of the year. PwC now expects IPO candidates to return gradually to the market towards the end of the year and early 2017, provided investor confidence improves and market uncertainties subside.
We believe that the traditional antipathy towards an IPO has been more about emotion and less about practical reality. Yes, companies considering an IPO need to demonstrate strong management and excellent corporate governance alongside innovation, growth and profit potential, but a number of well-known and well-regarded local companies demonstrate those virtues and more. Probably the appealing feature of an IPO is that it constitutes a share issue with no commitment to pay a fixed return and an acceptance by the holders of these securities that they are taking a risk with their capital.
There are many other advantages of having an IPO because issuing shares allows a company to create a currency which can be used to finance strategic acquisitions and enhance the value of the core business.
Could an IPO turn a Brexit in to an opportunity?
Market conditions and investor appetite can influence the right time to go for an IPO, but companies need to be prepared in order to exploit the optimal conditions within the market. A common misconception around the level of turnover and profit required to become a listed company, often removes the option early on in consideration. However the access to markets like the Alternative Investment Market (AIM) provide an opportunity for up and coming businesses to access this option at an earlier stage
A credible equity story and a strong management team are the core building blocks to starting on the journey and funds will travel if they perceive an opportunity to provide the return. That fear of losing control and wider visibility of the businesses performance can often be the stumbling blocks for local businesses. But, these need to be considered against the increasing global opportunities, impact of technology on our daily lives and how we do business and how the IPO market can provide a real option for accelerating growth and ambition.
As the UK is poised to leave the EU and look to new, wider and more distant markets, local companies that want to be poised and funded to take advantage of new opportunities should seriously consider if an IPO is the vehicle they need to turn Brexit into an opportunity.
Kevin be contacted on 028 9041 5560 or at firstname.lastname@example.org and will be hosting a seminar for companies considering an IPO 0n 25 October 2016. This will feature a number of IPO expert advisors and anyone interested in attending should contact Kevin directly.