Markets have been volatile in recent years, and with small windows of opportunity for fundraising for IPOs, many companies rush to the market unprepared for public life. The result of some of these listings has been marked underperformance relative to expectations and disappointment for some new investors and pre-existing stakeholders. There are some important lessons to be learned from this scenario to ensure that public listing doesn't necessarily end in tears.
There are some important factors to consider before public listing to ensure you are ready for life post-IPO.
If you are considering an IPO, be prepared before public listing with the governance, processes, structures, vision and rigour in place to avoid any potential fallout post-listing.
As Donald Trump is discovering, public life is not always as attractive as it may seem.
As many new publicly-listed companies are learning, the road can be long and challenging.
A number of IPOs have come to market during recent times, and while there have been success stories, such as Link Market Services, APN Outdoor, OneView Healthcare and MYOB. There have also been a number of disappointments and situations that have fallen well short of expectations, namely McGrath, Spotless, Dick Smith, Wellard, McAleese, Estia Health, and Temple & Webster. And then, there are some such as Murray Goulburn and Bellamy's Australia that have soared only to fall to earth on a faster trajectory than Ikarus.
In the current climate, companies are faced with global market volatility and continuous disruption on many levels. While it is impossible to control external factors such as the macro-economic environment -- interest rates, asset prices, Chinese demand considerations -- companies can influence their strategic direction, bases of competition, market channels, cost base, revenue sources and debt leverage.
Against this backdrop, the wider analyst community is anticipating the upcoming 1H FY17 reporting season to be the most productive reporting season since the 2008 global financial crisis. This heightens the opportunity and exuberance for investment banking and ancillary advisors to pitch another `IPO window'.
Given the increased scrutiny placed on public companies, it is important to ask the question -- is your business weatherproof and is public life the right course for your business?
Routes to Sponsor Liquidity and Growth Paths
There are two well-worn paths when pursuing either a monetisation and/or growth objective.
Assuming the scale and economics align, enterprises then pursue a dual track sale process. In this respect, the company and their advisors will explore and weigh up the merits of a sale to a trade party. Following this avenue, trade buyers are generally disciplined and will seek to ensure that the price paid can be justified in terms of the cost of capital, return on investment, synergy capture and how easily the business can be assimilated or integrated into and/or alongside their pre-existing operations. Mainly, they are usually able to extract maximum synergy capture, absorbing the business and operations as compared to a private equity ("PE") sponsor.
Alternatively, the pursuit of a public path process entails a highly credible investment story, maintainable earnings, a clear growth path and a management team that can deliver on the stated strategy. And lest we forget, an investment community and market that is prepared to buy into that public parade.
Private ownership means any underperformance issues and hard measures can be implemented by the owners, on an as-required basis. However, in the public spotlight and with the regulatory requirement for continuous disclosure, any market sensitive event or underperformance issue is scrutinised by the market. Depending on the views and events of the day, the market can be both fickle and demanding. Boards and management teams, in their custodian capacities, are expected to report to their stakeholders and explain their actions, even more so if they fail to deliver guidance targets. Inside the prospectus window i.e.12 months, such a scenario can lead to litigation and ensuing class actions, as in the case of Murray Goulburn and, outside the prospectus window, activist intervention, as in the recent case of Bellamy's Australia.
Common Elements of Success and Underperformance
We have examined a number of IPOs over recent years and have identified some key aspects commonly attributable to success or underperformance, as shown in Table 1.
What Does This All Mean?
When the capital markets are open and conditions align for private enterprises looking to go public, it is important to understand the rationale for sponsors and vendors and ensure that commercial discipline, sound risk management practices and governance processes are well formulated and adhered to.
We are looking with great interest to the upcoming 1H FY17 reporting season and will continue to comment on whether some of the newly clothed emperors have addressed their systemic challenges, or not. Equally, will the `IPO window' reopen in 2017 with renewed economic confidence post the global politically challenged environment of 2016 and which emperors will emerge fit and primed from their tailors' salon, with an appropriate choice of cloth to greet the ever demanding public audience.