While the IPO is the motorway of public offering events, a number of different routes are being explored by companies looking to access the public markets. Laurie Havelock investigates
Believe it or not, the initial public offering (IPO) – an event whereby shares in a company are first made available to members of the public – dates its lineage all the way back to the Roman Republic, where shares (partes) of ownership of legal bodies (publicani) traded in a type of over-the-counter market in Rome’s Forum.
Today, the IPO is how shares in the majority of corporations are made available to the public, thanks to the ubiquity of the stock exchanges that drive much local capital markets activity. But the ways in which companies come to market can be far less direct: often, private ownership structures – as exemplified by some of the world’s largest firms, many of them tech sector companies that were launched with venture capital backing or private cash – are hard to transition into the public domain.
Now companies are faced with several options: there are dual listings to reach investors in multiple constituencies, direct listings to ensure equal access to existing shareholders, or even special purpose acquisition companies (Spacs) and other more specialized instruments.
Tom Attenborough, head of international primary markets at the London Stock Exchange Group (LSEG), acknowledges that it’s been a tough time for IPOs, but believes traditional public offerings are bouncing back. ‘There’s clearly been a period recently where it’s been more difficult to get to market: we’ve seen volatility hit levels even higher than during the 2008 financial crisis,’ he explains. ‘Understandably, the first thing that goes in that environment is new listings as investors are instead focused on protecting the value in their existing portfolios and making sure those companies are adequately capitalized.’
With those higher volatility levels and a slow recovery in global equity markets in Q2 2020, IPO activity has remained subdued this year, though follow-on offering activity has recovered strongly, according to PwC’s latest figures. The accountancy firm found global IPO activity boosted toward the end of the half-year by a resurgence in the US IPO market as the impact of the Covid-19 pandemic began to wane: there were 186 IPOs raising $42.3 bn in Q2, with the Americas accounting for 61 percent ($25.6 bn) of global IPO proceeds in the quarter.
As Attenborough puts it, this ‘very significant’ pick-up in activity could have been boosted further were it not for the fact that more companies may be waiting in the wings to come to market, forced by the pandemic to postpone their plans.
‘The traditional way of listing through an IPO is far from being broken,’ he continues. ‘From a low point in mid-March, we’ve seen a pick-up in activity again. As risk appetite increases, we will start seeing a slightly more normalized IPO pipeline in the second half of the year.’
Direct listings offer speed, but with strings attached Whether or not the future of company floats becomes normalized again remains to be seen; in the wake of the pandemic, traditional trips to the stock exchange for a press-friendly IPO have been dropped in favor of virtual events (see Ring that virtual bell) where a company’s management team is live-streamed into an exchange's opening bell ceremony.
But this is nothing new, particularly in the context of direct listings, a route to market that received a lot of attention during 2019. The 2018 direct listing of the music streaming platform Spotify was the float that grabbed most headlines that year, due to both its scale (it valued the firm at $26.5 bn at the closing bell) and the fact that it would serve as a test case for privately owned tech firms going public.
The key difference with an IPO is the lack of underwriting assistance from an investment bank, and the fact that new capital is not created or raised. Instead, shares held by company insiders (employees, executives and private shareholders, for example) are made available to be bought by the public.
In its video, ‘Why direct list?’, Spotify says one of the main reasons behind the choice to list directly was to provide ‘equal access to all buyers and sellers’ without the intervention of underwriting syndicates, limited floats, IPO allocations or preferential treatment for any investor. ‘Unlike the traditional IPO, it’s a completely level playing field with no built-in pop for anyone,’ the company added.
Private listings and slow POs This is one of the key attractions for many companies, says Jason Paltrowitz, director and executive vice president of corporate services at OTC Markets. ‘You’ve got a significant number of companies that are private, with a large number of private investors that are looking for an exit strategy or the firms are looking for a way to increase their shareholder base,’ he points out.
‘For most firms, disclosure and transparency tend to be better in the public market, it’s easier to attract new investors and it gives your private holders the comfort that they can exit their investment.’
Paltrowitz and Attenborough both see the recent turn toward private listings as ‘nothing new’, an increasing fixture in the listings landscape for the past 15 years. The London Stock Exchange (LSE) has hosted several private placements – Metro Bank’s in 2019, for example – as well as listing LSEG itself in a private launch. Paltrowitz adds that OTC Markets has offered slow POs – which enable companies to go public by making previously restricted shares available for public trading by brokers on OTC’s various markets – for some time, and to a broader range of companies.
‘What we’ve seen in the small-cap space, the nano-cap space and the community bank space is a continuation of that theme,’ he explains. ‘Companies that aren’t ready, or don’t want the cost and complexity, or don’t need a full-on IPO, and that aren’t the tech unicorns of this world, are using our markets as a means of getting there.’
For Attenborough, the increased attention paid to private listings is down to two factors: first, there are more institutional investors, such as Old Mutual and BlackRock, that are ‘happy to buy into what we call crossover situations’, where private companies are committed to a public float in the near future; and second, the growing popularity of crowdfunding.
‘A direct listing has advantages for companies in terms of flexibility, but also disadvantages in the sense that the price formation is a little bit less predictable than a normal IPO,’ Attenborough continues.
‘Another difference is that existing shareholders will not agree to a six-month lock-up, which could be quite a daunting prospect for the IR team as you have no idea on day one who your sellers or buyers might be.’
There are other factors needed to make a direct listing a success: having executives who can engage with investors and the Street, particularly in the absence of underwriters, is crucial – as shown by Spotify’s launch – as is being a name already well known to the investment community.
Attenborough warns, however, that the process does still require support from investment banks – if only in an advisory capacity – and many of the same regulatory and due diligence requirements that an IPO demands.
Overall, it is also unlikely to save costs, he says: ‘If you think about all of the preparation you’ll be doing for a direct listing – putting a prospectus together, doing a management roadshow, working with investment banks, creating channels for feedback from investors – there’s a lot of that process that IR is still going to have to take charge of.’
Spacs are en vogue Perhaps this is why – beyond Spotify and messaging platform Slack – several of those firms reportedly considering a direct listing are still waiting to get under way, pending the NYSE’s long-awaited proposal to allow companies to raise new capital during direct listings.
One of those firms is data analytics company Palantir, which has lost backing from several large holders during the wait. Another is the home rentals firm Airbnb, which has had a tumultuous few years as it gears up for a public float – first through an IPO, then a direct listing – though its plans were disrupted by coronavirus, and the disastrous impact that had on the company's business model.
But in July Airbnb’s co-founder and CEO Brian Chesky said the firm was considering listing via a Spac, a ‘shell’ or ‘blank check’ company that uses IPO proceeds and debt to acquire another firm, typically within two years.
They come in two models: a pure cash shell that will then raise capital once an acquisition target has been identified, and bigger Spacs headed by big names that raise a much larger amount to fund a spree of purchases in a given area (UK retail, for example, or American minerals firms) but without naming targets in advance.
Both Spac models are growing in popularity due to their perception as a quiet route to market for companies concerned about the lengthy IPO process. Though both typically require an acquisition target in mind, any capital raised remains in trust until the Spac makes a purchase. As a result, they can sidestep market volatility and wait for the perfect opportunity – though they are not immune to the current pandemic-led uncertainty.
With smaller Spacs, private firms aim to save time, cost and hassle by reversing into a cash shell rather than conducting an IPO, says Attenborough. ‘But the work IR has to do is not dissimilar,’ he says, adding that there is still a need for a prospectus, underwriter, regulatory approval and the eventual capital-raise itself.
Investors are also drawn to some of the big names behind larger Spacs and their apparent ability to identify good targets. This summer, Bill Ackman’s Pershing Square Tontine Holdings raised a record $4 bn on the NYSE, despite its only public aim being to ‘marry a unicorn’, according to the billionaire activist investor. ‘So we’re prettying ourselves up for the most attractive possible partner,’ Ackman said, adding that the process is more efficient and less risky than other routes to market for private firms.
For Attenborough, these larger vehicles are still high risk, and much hinges on the star name attached to the effort. ‘It’s a unique form of funding and the success of these vehicles depends significantly on the history and track record of the entrepreneur sponsoring the Spac,’ he explains.
A deeper look at PwC’s figures shows Ackman is only part of a wave of Spac activity: the accountancy firm found that 24 US Spacs raised a total of $7.9 bn in Q2 2020. The success of Spac reverse-mergers at firms like Virgin Galactic, Nokia and DraftKings in the past two years has contributed to this.
Paltrowitz also tracks that rise in popularity to pre-Covid-19 times – even if regulatory requirements made smaller Spacs hard to carry out, due to shareholder number requirements or other factors. ‘The pandemic is pushing the other way, and the trend is for Spacs to get increasingly larger in size and dollar amounts,’ he notes.
‘There’s a perfect storm of a number of companies – whether that’s in the retail sector or further afield – becoming distressed, married to an excess of cash in the system that needs to find a home. Valuations are down and buying opportunities abound, while the Fed is printing money and fusing it into the system – and there’s no place to put it.’
Dual listings, dual investor pools If Spacs and direct listings have been on the rise for some years, then dual listings are certainly nothing new: oil firm Royal Dutch Shell was listed in both the UK and the Netherlands for almost the entire 20th century. But approaching a new market in search of more capital is something of a modern development and, as Paltrowitz puts it, is starting to catch on.
‘We’re seeing international companies looking to raise money on US public markets as well as outside the country,’ he notes. ‘If you’re not that large a company, maybe it doesn’t make sense to pursue that traditional route. But access to US investors is integral to many companies and their investor relations strategies.’
Paltrowitz also points to a few recent examples of companies looking beyond the US, such as Else Nutrition, which started out as an Israeli company that later went public on Canada’s TSX Venture Exchange ‘in a way that was more cost-effective and efficient’ than doing the same south of the border. The benefits speak for themselves: the promise of additional liquidity, access to more capital and the ability for shares to be traded across different time zones all outweigh the potential costs and regulatory burdens of a second listing.
Companies may also choose a dual listing to gain access to a particular pool of investors – not just those locked by region, but also those with a particular focus or special interest.
This was part of the reasoning behind Pensana Rare Earth’s decision to list on the LSE in addition to its Australian Securities Exchange listing, according to the company’s chairman, Paul Atherley. The Australia-based company, which is focused on exploration for rare earths, gold and copper projects in Tanzania, Angola and elsewhere in Africa, is hoping to find an audience of ESG-minded investors, he explains.
‘For us, to access the specific types of funds we were targeting, the LSE main board made sense,’ says Atherley. ‘We are not looking for mining funds, but rather for ESG, energy-transition or climate-related funds that want that stock-specific direct exposure. As to why we didn’t raise any capital, we were in a very privileged position and were being funded by the Angolan sovereign wealth fund, thanks to our projects in the country.’
The channeling of more funds into the green economy in a post-Covid-19 world that has only hastened that need, and the LSE’s provision of a green mark that identifies good ESG performers to investors were both extra incentives, Atherley adds.
Mechanically, dual listings see the same unit of stock listed on two exchanges, with prices remaining largely consistent (though divergences do occur from time to time, particularly when exchange trading hours are widely different). From an ESG standpoint, Pensana made the change to become a UK PLC and pay tax in the country, so as to shore up its governance practices.
‘It’s very hard to justify running a company in London if you’re based in an offshore tax haven,’ Atherley jokes. His firm has a dedicated ESG manager to oversee the needs of those investors and the content the firm generates and reports in that area, but Atherley says meeting their requirements is still a ‘long journey’ for all involved.
Several paths to choose from As demonstrated by Pensana, the best route to market is ultimately the one that best suits existing and potential shareholders, and is unlikely to be a decision made in isolation from wider corporate strategy. As Paltrowitz puts it, routes such as a direct listing, dual listing or going to a junior market can all be easier to handle and cheaper than the ‘marathon’ of going public.
‘You even see some firms – especially in the biotech space – that are forced into an IPO and do not perform very well on the market,’ he adds. ‘Consequently, the management team might be forced into making some tough decisions to meet listing requirements and resort to strategies such as a reverse split, which can kill the company's liquidity.’
Attenborough points out that thinking about what each route could mean for your company in particular is paramount, because factors such as reporting lines, your non-executive directors, the independence of a company's chairman and ongoing disclosure practices will all often dictate what is possible.
‘Ultimately, for an IR professional, the situation is the same irrespective of the route to listing: you want to focus on making sure your company’s story is best positioned in the market and continues to get the right airtime with investors,’ he concludes. ‘Once you’re on the market, you’ve got the same chance as everyone else.’
As IPOs continued during the pandemic, many firms turned to virtual ceremonies in order to maintain some semblance of normality. At the Shanghai Stock Exchange, 13 virtual IPOs were held thanks to several innovative measures: the bourse brought in a dedicated remote contract team, reduced listing fees and offered a special video that simulated a ringing of the exchange bell.
The first ceremony took place for Bestore, a snack food company headquartered in Hubei province, where the pandemic first started. On March 23, InnoCare Pharma also held a virtual listing ceremony at the Stock Exchange of Hong Kong. This was followed by Zentalis Pharmaceuticals’ virtual IPO and roadshow in April via Nasdaq, and Keros Therapeutics a few days later.
Nasdaq reported that virtual ceremonies piqued investors’ interest, and meant many efficiencies could be made: where traditional IPO roadshows often took 10 days, virtual ones could be completed in four.
‘You’re now starting to get IPOs coming through where they’ve done the entire thing digitally, without having had any investor engagement physically,’ says Tom Attenborough, head of international primary markets at the London Stock Exchange Group. ‘If you’d asked me six months ago whether that could be done, I’d have said no, as investors obviously treat the ability to sit in front of a management team and test how much they trust it as sacrosanct.
‘But the crisis has broken down a lot of stigmas and barriers like that, and people are just getting on with it, which I think is really encouraging.’
