UHY GLOBAL AUGUST 2020 PERSPECTIVES GOING PUBLIC


Initial public offerings are out of fashion as private finance backs growing businesses – but most companies still want to go public eventually When the Wall Street Journal called 2019 the ‘Year of IPO Disappointment’, it raised a few eyebrows. After all, this was the year that highly regarded firms like Uber, Lyft and Slack made stock market debuts. December brought the first public listing of oil giant Saudi Aramco, the most valuable initial public offering (IPO) on record. So why the Wall Street gloom? Because, according to some commentators, a few high-profile exceptions masked a far less positive picture. According to investment bank Renaissance Capital, there were 159 IPOs in the US with a value of USD 50 million or more in 2019, down from 192 the previous year. Historical comparisons paint an even starker picture. Between 1980 and 2000 an average of 310 companies went public in the US every year. Of the 250 public listings filed worldwide in 2019, Saudi Aramco’s was by far the largest. The most valuable IPO on record, the oil giant brings the number of state-owned company flotations in the world’s top five IPOs to three. Saudi Aramco was the world’s most profitable company in 2018, bringing in revenue almost twice that of Apple. In the same year it was responsible for 10% of global oil production, contributing USD 11 billion to the Saudi economy. Like many nations across the Middle East region, diversification away from oil is now part of Saudi Arabia’s economic strategy. The kingdom intends to use funds raised by the Saudi Aramco IPO to support this. EBBS, FLOWS AND FLUCTUATIONS The downward trend for IPOs is global. According to data from Dealogic, the number of new listings fell by one fifth in 2019, and the trend has been gently downwards for two decades. Globally, companies raised a combined USD 188 billion from IPOs last year, a three-year low. Hopes for an upswing in 2020 have been dashed – like so much else – by the coronavirus pandemic. Dominik Biel, partner at UHY ECA, Poland, confirms the trend from a local perspective. “We have seen a declining number of companies debuting on the Warsaw Stock Exchange since 2015,” he says. “In that year 30 companies conducted the IPO process, while only seven did in 2019. It’s worth noting that in 2007 the number was 81.” Nor was the small number of debuts offset by the value of the shares offered, Dominik confirms. The combined value of both existing shares and new issues on the Warsaw Stock Exchange was 25 times higher in 2017 than 2019. That is a dramatic decline. So why has the popularity of the IPO waned? UBER STILL AWAITING LIFT Dominik points to local factors, like reform of the Polish pension system and economic scandals, for contributing to the decline. Steven Pinsky, consulting principal for UHY Advisors NY, Inc., US, sees larger forces at play behind the modest number of recent IPOs. “The public markets are subject to a plethora of external micro and macroeconomic factors which affect both regular and irregular fluctuations in market liquidity,” he says. “There are times at which the market is just not susceptible to new offerings. Some of the fluctuations are typical market cycles while others are impacted by external market influences. The coronavirus crisis is a perfect example.” While coronavirus is negatively affecting IPO numbers in 2020, last year Brexit and the China-US trade standoff helped dampen investor enthusiasm. And while some smaller IPOs did well, one highly anticipated listing flopped. Uber’s stock market debut lost more in dollar terms than any other American IPO for over 40 years. Robert Kidson, managing director of corporate finance in the London office at UHY Hacker Young, UK, agrees that enthusiasm for IPOs can ebb and flow with wider market conditions. “Companies will choose to list their shares if the market is conducive to listings – i.e. there are investors wishing to put funds into an IPO and there is adequate liquidity in the market – and if not they will probably look at other alternatives or simply wait,” he says. Companies considering public listings refuse to be rushed into decisions. Rumours of Saudi Aramco’s IPO had been circulating for years before its eventual debut. Growing businesses always need finance, whether to move into new territories, invest in infrastructure, or buy out competitors. One reason for the slowing rate of public listings is that so many alternative channels of finance now exist. They allow companies to remain privately owned while achieving many of their early business goals. If the IPO environment is not optimal, companies can and will wait until it is. While private finance channels have always been an option, the sheer volume of venture capital out there is new. According to data from Pitchbook and the National Venture Capital Association (NVCA), the venture industry ploughed USD 136.5 billion into US-based companies in 2019. In the same year, Crunchbase projects that, globally, roughly USD 294.8 billion was privately invested in nearly 32,800 deals. Venture capital has become a huge contributor to company growth, especially in the technology and biotech sectors. Similarly, angel investment (individuals who back startups at an early stage) has helped create a startup culture, allowing a generation of entrepreneurs to turn good ideas into viable businesses. Private equity funds are seeing record levels of fundraising, while family offices are accelerating investments in private companies. The advantage of all these channels is that they can offer quite significant funds while shielding firms from public scrutiny. “Companies that list obviously have to report their figures more regularly and are subject to the ups and down of the stock market, whereas private equity backed companies are not subject to the same public scrutiny,” says Robert Kidson in the UK. Steven Pinsky agrees, suggesting that, for some companies, remaining in private ownership has competitive advantages, especially during the scaling phase of business growth. “Private companies can shield competitive information that public companies may not be able to, such as acquisitions, known risks and executive compensation,” he says. He also pinpoints another advantage of delaying an IPO. A lot of private investment comes with the promise of business expertise, also known as ‘smart money’. “In many cases, financing sources such as private placements or private equity come with financial and operational expertise to assist companies in achieving and managing growth,” he says. “Partnering with a reputable private equity fund or family office gives you access to resources such as financial advisors, operational advisors, buying groups, and business improvement consultants.” VENTURE CAPITAL CAVEATS Venture capitalists also offer business support, and that can be invaluable to some growing businesses. But the venture capital route is not for everyone, as Mark Nicholaeff, UHY Board member, chairman, UHY Haines Norton, Australia and New Zealand, and partner, UHY Haines Norton (Sydney), Australia, explains: “Most venture capitalists impose onerous financial conditions and depending on the quantum of the investment may require close involvement in the company. Some companies do not want a venture capitalist looking over their shoulder all the time,” he says. “On average, however, a company will always take this route first, assuming it is not too onerous, as the shareholders do not want to dilute a company that has a good future, as the value may significantly increase in the short term.” In Poland, Dominik Biel agrees that venture capital often comes with strings attached. “Companies wishing to benefit from venture capital support must take into account the partial loss of control over managing the enterprise, because these funds have a very active management policy,” he says. Entrepreneurs may resent such interference. Luckily for them, technology has also sparked the creation of completely new channels of business funding. While not common everywhere, instruments like crowdfunding and Initial Coin Offerings (ICOs – a type of funding using cryptocurrencies), are increasingly popular in some jurisdictions. Crowdfunding is usually more appropriate for businesses at a relatively early stage of development. “The growth of financing platforms such as Kickstarter and GoFundMe are creating an alternative financing source for growing companies,” says Steven. “The cost of alternative sources is often less expensive and intrusive than IPOs. The downside is that many of these funding sources have limitations on the size of funding realistically available.” DELAY – NOT REPLACE While alternative financing channels are increasingly popular, most are designed to delay the need for an IPO, rather than replace it entirely. And while many eligible companies may wait for exactly the right market conditions, they are unlikely to abandon the idea of going public altogether. For established businesses with a stable market position, IPOs remain a potent form of both financing and publicity. “The companies that don’t IPO are the ones that have minimal probability of successfully listing or do not want the regulatory burden. Otherwise IPOs are still the preferred route for most established businesses,” says Mark Nicholaeff. Robert Kidson mentions that private investors will eventually be looking for a return, often realised by an IPO. Indeed, growth stage investment is sometimes offered in the implicit understanding that a successful business will eventually float. As Steven Pinsky explains, private equity funds are seeing record levels of fundraising in part because they offer business owners cash now and the promise of more cash – “the proverbial ‘second bite at the apple’” – later. “It lets them take money off the table while still maintaining both operational control and enough of an equity stake that they benefit significantly from a future liquidity event, be it sale or IPO,” he says. “The alternative crowdsourcing options are also allowing companies to delay the expensive IPO process or a dilutive PE investment with a less dilutive or less expensive option until larger growth investment capital is needed.” In many scenarios an IPO is still the default destination, even if it is a little further down the road than in the past. And before the pandemic, some experts were predicting that 2020 might see a bounce back in IPO numbers, as market conditions improved. That might now be delayed till 2021. TAILORED SUPPORT When normality resumes, the good news is that UHY has the expertise to help companies navigate the complex IPO process and make successful stock market debuts. Expert professional advice is crucial for companies considering public listing, tailored to local circumstances. “In Australia, an operating company requires three years of audit and an Independent Accountants Report (IAR) to be included in the prospectus,” says Mark Nicholaeff. “We can provide both services. Due to our experience with many listings we can guide a company through the listing process and introduce the company to the other required service providers, like lawyers, underwriters, promoters and so on.” Robert Kidson says that, for companies that have not listed before, UK member firm UHY Hacker Young provides a ‘hand-holding’ service throughout the process. In Poland, UHY ECA also provides a complete service, including preparing businesses for the rigors of reporting as a public company, while Steven Pinsky says UHY Advisors in the US provides “comprehensive attest and compliance services” as well as a full menu of ancillary solutions. IPO numbers have declined in recent years, as companies tap into other sources of finance to meet initial business goals. But for companies that make it that far, an IPO can still be the ultimate aim. The UHY network is ideally placed to help companies thrive as they transition fromprivate to public entities.


Image: iStock.com/Pgiam


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