To float or not to float?
2021 has seen a resurgence in IPOs on the London’s AIM market. The third quarter of 2021 alone saw a record breaking 19 AIM floats raise £1.1bn, compared to just £76m in the period in 2020. The surge in stock markets over the past 12 months has created a compelling opportunity for companies to access capital and shareholders to realise their investments.
For private equity funds operating in the SME market, exit via a float is relatively unusual, with the majority of sales to either trade buyers or larger investors. In July 2021 KCP floated portfolio business Cmostores (CMO), delivering a 6.2x return to our investors based on float price. CMO is an online retailer of building products, disrupting a large market dominated by traditional bricks and mortar operators. CMO is the second business KCP have exited via the public markets, having previously floated online retailer Gear4music in 2015 generating a 5.0x return to our investors. We thought we would share with you a few lessons that we learned during these IPO processes.
1. Don’t miss the window Public markets operate in cycles, or perhaps waves. The chances of successfully completing an IPO rely on the markets being open; when capital flows into the markets and portfolio managers seek to deploy their funds. You may sail through the lengthy planning and due diligence process, racking up eye watering costs as you go, but when you hit the critical two-week investor roadshow you are at the mercy of the market. There is a long list of uncontrollable factors in an IPO process. The behaviour of the markets is probably top of the pile.
2. Planning is all Having already backed and floated Gear4music we knew that the public markets were a credible option for CMO. Investors are seeking truly disruptive businesses operating in large markets. The public markets help raise a company’s profile, whilst also providing access to capital to support growth. It may become apparent that the IPO window has materialised, but you must be in a position to capitalise on the opportunity. The CMO board spent three years carefully assessing the possibility of a float, developing relationships with the appropriate advisors and positioning the business to exploit the opportunity if it arose. Planning ahead allowed us to move at pace when we saw the markets were receptive.
3. Be prepared to go “all in” An IPO process is all consuming. With the best will in the world, it is hard to list a business on any public market in less than four to six months. It is difficult to overstate the amount of time, energy and money that is consumed during this period. A well-resourced and resilient senior management team are needed to get through the process. There is also the small matter of fees. Pressing the “GO” button on an IPO process means committing to a large cost underwrite, regardless of the result.
4. Build your army of advisors There are only so many appropriately qualified advisors available to support a listing. Demand for these skills is at an all-time high, whilst advisors are often struggling to hold onto their teams as wage inflation increases and employees seek Covid related lifestyle changes. The early selection of the right advisors and ensuring they are available to meet your timetable is essential. Many businesses over the past 12 months have been thwarted by the limited resource available.
In a private transaction the buyer can be selective with their advisors and the scopes of work they wish to develop to address their due diligence programme. The IPO process is far less flexible. The rules are prescriptive and must be followed. As a result, be prepared to build a small army of advisors. Choose these individuals carefully. You will be working ‘cheek by jowl’ for an extended and pressured period of time.
You will need a broker, with strong sales and banking teams, and critically leading analysts in your market. You may also want a corporate finance advisor to help bolster resource and do a lot of the heavy lifting to support your management team. Legal Advisers may seem expensive, but a well-resourced and experienced team are worth the cost and will earn their fee. Reporting Accountants will lead the financial due diligence. Your CFO or Finance Director will need to develop a strong relationship with the reporting accountant. Last but not least is a PR Advisor. Sooner or later your plans will hit the public domain. It is important to be prepared for the story to leak and agree a strategy. With the rest of the process unfolding this can be a distraction (or panic) if not prepared.
5. Own your numbers It may sound obvious, but nothing builds investors’ confidence through an IPO process than a team that delivers their numbers. Your many advisors will no doubt share their views on your plans. Based on their experience, they may feel your plans are too conservative or perhaps too aggressive. These opinions can help shape your thought process in the early days, but remember, only the management can deliver those numbers. Owning and delivering the numbers will be a critical factor when it comes to building a blue-chip, long-term focussed investor base. A quality investor base, strong trading and a fair wind might just help you achieve that much coveted upward share price trajectory. Hopefully you have found this interesting and if you are about to embark on this journey – good luck!