For some time now, the media has been running stories that the IPO market remains sluggish. Indeed, as recently as 30 May, Financial News reported that 3 planned IPO’s worth over $0.5bn had been cancelled or postponed that week alone, citing market volatility.
Certainly, discussions with the management at many companies confirm there are fewer and fewer attractions of being a public listed company; your results are subject to increasing scrutiny from both analysts and media; the corporate governance requirements continue to grow, and there is a particularly strong focus now on executive remuneration.
If you’re a private company, you can sidestep most of this and stay below the radar. Sure, you may have to put up with a private equity shareholder, which can be quite demanding, but perhaps it is better to have one or two well-informed, relatively long-term shareholders rather than have to seek investment from a larger number of investors as a public company. Remember, in addition, that the old business model in public equity markets is being substantially disrupted by the MiFID ll regulations, whilst also probably increasing the costs of being a PLC.
And it is not just private equity which is leading the charge here. Last week the private investment vehicle of the Reimann family, JAB Holdings, bought the Pret-a-Manger business, at a price of £1.5bn, which was reported to be well ahead of the likely IPO valuation.
It is probably a fair point that a private company often has an advantage in terms of investing for the long-term rather than being obliged to report quarterly results, which inevitably leads to a shorter-term time horizon. On the other hand, being a public company can bring easier access to capital, as well as the opportunity to build a wider business mix both in portfolio and in geography.
The world has really been turned on its head. We had got used to the “dual-track” process where companies explore at the same time an IPO and a private sale. Traditionally, the private company was seen as the buyer of last resort, stepping in when the public equity markets were struggling to justify the valuation. Now it appears that the IPO process may be taking over as the least preferred option, if nothing else works.
This new world does start to present some problems, eg private companies do rely on public companies to give some benchmark levels for what a business is worth. With less public companies now visible in some sectors, it may become difficult to get a sensible valuation for a transaction in future.
And, of course, you have a huge infrastructure of financial markets – in the selling, trading and researching of public equities market, as well as in some banking functions – whose livelihood is seeing a double whammy as a result, with the additional negative impact from the MiFID ll regulations.
So what could lead to a revitalisation of the IPO? Well, what financial markets have always taught us, is that when the traffic all looks to be going one way, it is likely to turn fairly quickly. When every analyst following a quoted share has a Buy rating, a savvy investor will think it is time to sell. So we may be approaching an inflection point here. As to the catalyst, that is not clear: it may be that rising interest rates could start to impact negatively on the traditionally debt-driven model of private equity. Certainly, any major volatility in financial markets is likely to be a bigger issue for private equity, with a higher leveraged model, than for public equities.
And you certainly have a large number of people in the world of banking – and to a smaller extent, in the world of financial communications – who would breathe a sigh of relief if public once again looked more attractive than private.