James Anderson, Partner in PwC’s Equity Advisory, explains how to be IPO-ready in a politically and economically unstable environment
Perhaps some of us who are engaged in finance may look back with a certain nostalgia to the time a couple of years ago when the chief source of market instability was Greece, and a feared “Grexit”. That situation was worrying but few of us at the time would have predicted the seismic events at home which have erupted since, most notably the Brexit vote and the political turmoil which has followed. One could be forgiven for turning back to Greece, and the ancient philosopher Heraclitus, who famously concluded: “everything flows, nothing stands still”.
Heraclitus’ world-view of flux and instability could well be seen in today’s political and economic climate, and one might assume that this would be feeding through into IPO markets – but that is not the case. As the data confirms in PwC’s latest “IPO Watch”, we have so far this year seen very healthy levels of IPO activity across Europe, with IPO companies performing strongly in the aftermarket.
How supportive are markets and will it continue?
The data from PwC’s IPO Watch 2Q17 shows strong levels of IPO activity have taken place in Europe over the first half of the year, gaining momentum over the second quarter.
The value of IPOs priced in Europe in 1H17 was up by 39% compared to the same period in 2016, including a number of sizeable deals across financial services, technology and e-commerce, healthcare and industrials. The number of deals was also high, with 103 IPOs priced, the highest quarterly number since Q4 2015.
London continues to hold its position as a pre-eminent global IPO centre, with some large cross-border deals taking place over the last quarter. This cross-border flow is expected to increase, with a number of major potential issuers currently in preparation.
There are two factors to consider when asking the question of whether this activity is likely to continue. Firstly, the continuing rise in stock markets means that valuations continue to be attractive. Secondly, volatility has remained at low levels in 2017, despite the election activity across Europe over the period.
What qualities are investors looking for?
Although recent IPO issuance has been healthy, activity levels are nonetheless below their historic highs and whilst a number of businesses have been successful, some are holding back.
A large number of organisations are also running “dual track” processes, where they explore the potential for a sale at the same time as preparing for IPO.
Investors are selective and there are some characteristics which are particularly in focus.
Clear market leadership. There is currently a clear preference for companies which can demonstrate that they are leaders in their sector. This might be evidenced in terms of market share, where a company is either number one, or on its way to being so, by showing a strong track record of taking market share from others.
Strong barriers to entry. There may be a number of elements which constitute barriers to entry: for a technology focused business, intellectual property and cutting-edge innovation will likely be key; for a customer-facing business, investors will be looking for “stickiness” measured in high levels of repeat business, relevance and difficulty of substitution.
Visibility and quality of growth. Investors are focused on predictability of growth and the ability to extrapolate a reliable trend from historic performance. In addition, management teams need to be very clear in how they articulate the balance between growth and profitability. The emphasis on one or the other will vary considerably between sectors, but investors will want to understand the strategic rationale for that emphasis.
Depth of management experience. This has always been a factor but in today’s markets senior management teams really need to “own” the strategy and will be tested hard on historic performance.
In a climate when there is a degree of uncertainty about the direction of UK economic growth, it is helpful to be able to demonstrate a degree of resilience to cyclical fluctuations.
What planning and preparation is recommended?
At present, there is a considerable volume of companies that are working on their planning and preparations in advance of a potential IPO. Here are some key themes to draw out for CFOs:
- Start early. It is a feature of IPOs that discussions with investors typically start early with initial “early look” meetings, sometimes a year before the planned pricing. For an IPO in 2H 2018, or even in 1H 2019, issuers need to be starting the preparatory work now.
- Get the equity story and KPIs clear. This will feed into early investor discussions, briefing the banks and analysts, and ultimately into prospectus disclosure. Take time up front to get it right, including ensuring the systems and modelling is set up to support the planned disclosure.
- Do an IPO readiness “health check” and start fixing any gaps. IPO-hardened CFOs will confirm that in the throes of deal execution there is usually not the time or bandwidth to be putting through the structural and operational changes needed for the public markets. A year ahead of a potential IPO should normally give enough lead time for a busy finance team to make the needed changes.
The UK is in uncertain times but the IPO window is open and investors are receptive to attractive stories across industries. The key to success – and, importantly, to ensuring the finance function can cope – is to understand the process and to prepare early. As Plato said, the first step is what matters most.
James Anderson is a partner in PwC’s Equity Advisory.