2023 has been described as a ‘lacklustre’ year for IPOs, but there is quiet optimism that several long-awaited IPOs will list on the Main Market before the year’s end. Whether that triggers a greater investor appetite for IPOs depends on several factors, particularly the impact of inflation rates, commodity prices and interest rates. Recent economic uncertainty has led many companies to adopt a ‘wait and see’ approach.
Of the IPOs that have taken place, the London Stock Exchange (LSE) has dominated the European market both year-to-date and in Q3. There is evidence that the valuation gap between investors and issuers are narrowing, as indicated by the pricing of recent IPOs, but the real indicator of an improvement in the IPO market in 2024 will be the aftermarket performance of those companies that have conducted an IPO. Investor focus is concentrated firmly on companies’ post-IPO performance.
There are several factors that contribute to a positive post-IPO track record. A study by Nasdaq shows that companies with greater sales on the day of their IPO tend to perform better over a three-year period than companies with smaller sales and less market penetration. Another key determinant of long-term success is how companies spend their IPO proceeds. Investors prefer companies that focus on growth by enhancing and developing their operations, technology, infrastructure, brand, products and services and acquiring other companies.
Post-IPO success also depends on how quickly companies develop the effective investor communications and finance functions required by the higher level of accountability and scrutiny that comes with going public. Companies need to attract a sustainable pipeline of investors and consistently deliver shareholder value. Delivering on its pre-IPO promises is crucial for a company’s post-launch prospects in this new stage of its corporate life. The work the company does in preparing for the IPO can go a huge way in setting the stage for long-term success. Here we look at the key factors in the process of preparation.
Key factors in preparing for an IPO
The time-consuming effort and planning companies put into preparing for an IPO is crucial for a successful launch and helps the company adapt to post-IPO requirements. The introduction and enhancement of practices and systems in readiness for launch bring efficiencies and competitive advantages that form the firm foundations for future business achievements. Many successful companies view an IPO as a significant stage in the company’s journey rather than the end goal.
An honest examination of what the company wants to achieve by going public, and the advantages and disadvantages of doing so, is the starting point. This involves weighing the benefits of raising additional capital and increased prestige and public exposure against the additional costs of transforming the company and adviser fees, greater accountability and public scrutiny, and alternative methods of funding.
Timing is a crucial factor. The management team and its advisers must decide when to go public. Getting the timing right is crucial: the company must be ready to go through the IPO process when investor appetite is whetted for new issues and, particularly in the company’s operational sector.
Firm financial foundations are essential for going public. A company needs to impress investors with a strong financial track record: steady and predictable earnings, strong margins and cash flow. Solid finances and management processes will stand the company in good stead for more rigorous post-IPO financial reporting requirements. Financial reporting will typically incorporate detailed and consistent analysis of past and forecasted future performance, and greater transparency backed by audit trails.
Demonstrating positive prospects is essential, especially as growth is a key determinant of post-IPO success. Indicators include a competitive advantage over competitors, a differentiated and popular product or service, an increasing share in an accessible, large, and growing market and a path to profitability. This should be reinforced by systems that can detect potential problems before they emerge and help to manage them.
Good corporate governance is a prerequisite for a successful launch and for solid post-IPO business. An effective governance framework should be transparent, cover all policies and processes, comply with legal and regulatory requirements, and hold the board and executive management accountable to stakeholders. ESG performance and disclosures are closely monitored by key stakeholders, including shareholders, existing and potential investors, customers, employees, regulators, and media.
Getting the right board of directors in place is important to satisfy corporate governance requirements and for managing the company. Appointing respected, influential, and experienced board members can enhance the perception and reputation of a company and be helpful to senior management in guiding it through the IPO process and achieving post-IPO strategic objectives.
Specialist advisers, such as accountants and legal experts, help companies manage their businesses. They help companies navigate the greater scrutiny and transparency requirements that come with going public. In the first instance a company will need specialist IPO experts who are familiar with the processes and due diligence requirements for a company preparing to go public and immediately afterwards.
A well-crafted equity story is essential to attracting investors and convincing them to buy shares in the company. The equity story should clearly articulate the company’s business proposition covering its product roadmap, brand identity, position in the market, and growth objectives. The equity story is central to all pre-IPO communications to investors and analysts, especially presentations and investor roadshows, and becomes a key post-IPO corporate function. Controlling the corporate narrative is the bedrock for investor and shareholder communications, managing reputation and image and for building positive brand awareness, recognition and loyalty.
Effective investor and shareholder communications depends largely on the ability to control the company’s narrative. Positive relationships with these important stakeholders are fundamental to the company’s long-term success. The experience gained in providing a reasoned, compelling narrative for investors to back their IPO is invaluable for efficiently managing future investor and shareholder communications.
Long term commitment
The transition from private to public company requires long-term planning in which every experience and lesson learned is invaluable for future success. The effort companies put into being ready for their IPO helps to prepare them for corporate life after the IPO has taken place. A successful IPO can provide the basis for achieving strategic objectives of growth and market leadership and for enhanced brand reputation and image. The important thing is for companies to sustain their efforts after launch and keep their pre-IPO promises, as investors and shareholders will focus on these. Delivering value to these key stakeholders is the key to a company’s future success and for a healthy IPO market in the future.
Perivan is the UK’s market leader for producing Main Market IPO prospectuses and AIM admission documents, producing 41% of IPO admissions to the LSE in 2021 and 103 of the 346 IPOs over the last five years. Many companies use a data room to manage the due diligence for their IPO. Perivan’s data room, Engage, is used extensively for pre-IPO fundraising, all facets of the IPO process, and post-IPO corporate finance, such as M&A transactions.
If you would like to know more about Perivan’s IPO prospectus, pre-and post-IPO corporate finance, and investor and shareholder communications capabilities, or see a demo of Engage, please get in touch with our team.