The London IPO market started its comeback in 2012 but 2013 proved to be the turning point with a significant improvement in market confidence and investor appetite. As ever, private equity sponsors have been quick to take advantage of the IPO window. During 2013 there were 105 IPOs on the London markets, of which 18 were IPOs of private equity-backed companies (12 onto the Main Market and 6 AIM transactions). This equated to 54% of all financial sponsor-backed IPOs in 2013 on European exchanges. The early successes of 2013 have driven
more and more businesses to consider the IPO route. The market is anticipating approximately 50 -60 IPOs during the first quarter of 2014, many of them will have started the process in earnest during
the second half of 2013 in response to the deals that got away at that time. This is the strongest pipeline that London has seen for some years and at its current pace 2014 may exceed the 252 IPOs
recorded in 2007.
Given the importance of the IPOs that took place in 2013 as a point of reference for what is happening in the market currently, we have prepared a detailed analysis of those deals on the pages that follow.
Our analysis looks separately at IPOs on London’s Main Market and AIM. A comparison of the 2 sets of data highlights a number of features worth noting:
• in broad terms a deal at sub-£100m market capitalisation
at IPO is more likely to go to AIM and above that level
to the Main Market; however, in our view at a market
capitalisation between £100m and £200m it is debatable
whether AIM or the Main Market is the right listing
venue and the decision may well turn on a number of
factors. For example, if the company has a high growth
strategy which is likely to lead to regular M&A activity
or additional equity financing then AIM may be a
better listing venue in the first instance given its lighter
regulatory regime;
• it may be a surprise to some to see the relatively small
size of some of the deals that have been successfully
completed on AIM (and the strong share price
performance that has ensued in many cases). We
believe that 2014 will produce more exits for small and
middle market sponsors;
• an IPO is rarely a full exit for a sponsor. However, if
the deal is priced appropriately, our analysis shows
that share price performance has been overwhelmingly
positive, giving an opportunity for further exits at higher
valuations in the short term;
• the aggregate equity stake retained by sponsors on AIM
deals has been lower on average than on Main Market
transactions;
• unsurprisingly, an AIM transaction is much less likely to
warrant a syndicate of investment banks;
• underwriting commissions on AIM deals have
traditionally been higher (in part that is a reflection of
the smaller amounts being raised and in some cases the
higher execution risk), although competition appears to
be increasing all the time for deals with good quality
assets. We expect the combination of base and
discretionary commissions at levels not dissimilar to
Main Market transactions to become more prevalent in
AIM IPOs involving private equity sponsors during 2014;
• whilst the lock-up period on a Main Market transaction
is invariably 180 days with no additional orderly market
restrictions, on AIM transactions an additional orderly
market period is much more likely (a reflection of the
lower trading volumes likely for some of the deals
referred to and therefore the greater risk of volatility in
the after-market);
• a common feature across both markets is the concept of
a relationship agreement, designed to ensure that the
company maintains independence from its controlling
shareholders following the IPO. This agreement has
become a device for maintaining certain investor
protections for the private equity sponsor, most notably
board representation whilst it retains voting rights above
a pre-defined percentage. You will see from our analysis
that the precise terms tend to vary from deal to deal but
the principle is generally accepted by the market, although
there are obvious conflict of interest and confidentiality
issues for both the company and the sponsor to consider
when putting these arrangements in place. There are a number of features of the current market that suggest that there is still plenty of capacity for more deals.
For example, the fee pressure on underwriters and other advisers indicates that there is fierce competition among
advisers, particularly to work on deals with good quality assets.
The size of underwriting syndicates seems to be increasing,
typically with a mix of bulge and mid-market firms involved.
The discretionary element of the commission structure has
become standard and is increasing as a proportion of overall
commissions, with issuers becoming more sophisticated
in terms of how they determine whether such fees should
be paid, and, if so, when and to whom. Similarly, in many
cases, total deal expenses look low relative to the size of the
transactions indicating very competitive pricing among legal
and accounting advisers.
However, the market is not achieving this level of efficiency
on its own. One of the most notable developments in the
current IPO cycle is the increasing prominence of independent
financial advisers, such as NM Rothschild and Lazard. These
firms are often appointed by companies (and their owners)
at a very early stage to advise on the viability of an IPO and
other potential exit routes.
If an IPO is pursued, the independent financial adviser
will run much of the IPO process, including a detailed
selection process of underwriters and other advisers. The
fee expectations of such financial advisers may make it
uneconomic to involve them on smaller deals, but on larger
transactions their appointment has become commonplace.
Whether or not an independent financial adviser is involved, if
you are considering an IPO of a portfolio company, early test
marketing to a select number of potential investors is crucial.
The feedback from that exercise should give an early indication
of both the viability of an IPO and the likely valuation range.
With the benefit of that information the company and its
owners can make a better informed decision on whether or not
to pursue an IPO. Given that test marketing is relatively easy
to achieve with little (or no) upfront fee exposure, it seems a
sensible strategy to undertake. Private Equity Exits Via London IPOs in 2013
Date Company Sector Private
equity
sponsor
Market
cap at
IPO
(£m)
IPO size
(£m)
1
Sell
down as
proportion
of IPO
2
(%)
Price
change
since
IPO
3
(%)
Aggregate
sponsor
retained
stake on
IPO
4
(%)
Banks Commission/fee
structure
Total estimated
expenses
(including
commissions)
(£m)
Relationship
agreement
5
(key terms)
Sponsor lock-up
+ orderly market
periods
(months from
IPO)
Main Market
18 Feb Crest Nicholson
Holdings plc
Real Estate Varde;
Deutsche
Bank; KBC;
Natixis (and
others)
553 225 75 66 47 Barclays Bank;
HSBC; Lazard;
Numis Securities
2% plus up to 1%
discretionary
6 • Subject to certain
conditions, terminates when voting
rights fall below
30%
6 + 0
25 Mar Countrywide plc Real Estate Oaktree;
Apollo;
Alchemy
748 200 0 63 62 Goldman Sachs;
Jefferies; Credit
Suisse
2.5% plus up to
0.5% discretionary
8.8 • Certain standstill
provisions
• Right to nominate 1
director
• Terminates for each
sponsor when voting rights fall below
10%
6 + 0
27 Mar esure Group plc Insurance Tosca Penta
Investments
1,209 604 92 -6 12 Deutsche Bank;
JP Morgan;
Canaccord
Genuity; Numis
Securities
2% plus up to 1%
discretionary
7 N/A 6 + 0
2 Apr Hellermann Tyton
Group plc
Electronic
& Electrical
Equipment
Doughty
Hanson
420 212 86 52 46 Goldman Sachs;
JP Morgan; Numis
Securities
2.5% plus up to
1% discretionary
5 • Right to nominate 1
director whilst voting
rights above 10%
• All other material
terms end when voting rights fall below
30%
6 + 0
1 Assuming no exercise of an over-allotment option (if any). Such option, if exercised following the IPO, typically
involves the sale of shares representing up to a further 10-15% of the offer.
2 Assuming no exercise of an over-allotment option (if any). Note that in addition funds raised by the company
through the IPO in many instances are used to repay debt or to redeem other instruments in the capital structure.
3 As at 31st January 2014
.
4 Assuming no exercise of an over-allotment option (if any).
5 A relationship agreement governs the relationship between the company and any controlling shareholders
following the IPO, requiring them to maintain the independence of the company from such shareholders.
Sources: London Stock Exchange and relevant company prospectuses and announcements
Date Company Sector Private
equity
sponsor
Market
cap at
IPO
(£m)
IPO size
(£m)
1
Sell
down as
proportion
of IPO
2
(%)
Price
change
since
IPO
3
(%)
Aggregate
sponsor
retained
stake on
IPO
4
(%)
Banks Commission/fee
structure
Total estimated
expenses
(including
commissions)
(£m)
Relationship
agreement
5
(key terms)
Sponsor lock-up
+ orderly market
periods
(months from
IPO)
12 Jun Partnership
Assurance Group
plc
Insurance Cinven
Partners
1,540 485 75 -16 56 Bank of America
Merrill Lynch;
Morgan Stanley;
Evercore Partners;
Keefe, Bruyette &
Woods; Panmure
Gordon
1.5% plus up to
1.5% discretionary
22 • Right to nominate
2 directors whilst
voting rights above
30%, otherwise 1
director
• Terminates when
voting rights fall
below 15%
6 + 0
26 Jun Al Noor Hospitals
Group plc
Healthcare Ithmar Capital 672 221 56 46 28 Deutsche Bank;
Goldman Sachs;
HSBC Bank; NM
Rothschild
1.75% plus
0.35% on
proceeds not
procured by
underwriters plus
0.25% sponsor
fee plus
0.5% plus up to
1% discretionary
12.3 • Certain non-compete
restrictions
• Subject to certain
conditions, right to
nominate a maximum of 2 directors
• Terminates when
voting rights fall
below 10%
12 + 0
25 Sep Foxtons Group plc Real Estate BC Partners 649 390 86 52 28 Credit Suisse;
Numis Securities;
Canaccord
Genuity; NM
Rothschild
2% plus up to 1%
discretionary
6 • Certain voting, noncompete and nonsolicit undertakings
• Right to nominate 1
director
• Terminates when
voting rights fall
below 15%
6 + 0
11 Oct Arrow Global
Group plc
Financials RBS Asset
Management
358 189 74 19 29 Goldman Sachs;
Jefferies;
Canaccord
Genuity; Numis
Securities; Lazard
& Co
2.5% plus up to
1% discretionary
8 • Right to nominate
2 directors whilst
voting rights above
20%, otherwise 1
director
• Terminates when
voting rights fall
below 10%
6 + 0
Date Company Sector Private
equity
sponsor
Market
cap at
IPO
(£m)
IPO size
(£m)
1
Sell
down as
proportion
of IPO
2
(%)
Price
change
since
IPO
3
(%)
Aggregate
sponsor
retained
stake on
IPO
4
(%)
Banks Commission/fee
structure
Total estimated
expenses
(including
commissions)
(£m)
Relationship
agreement
5
(key terms)
Sponsor lock-up
+ orderly market
periods
(months from
IPO)
25 Oct Stock Spirits
Group plc
Beverages Oaktree 470 258 80 23 38 JP Morgan;
Nomura; Jefferies;
Berenberg
2.25% plus
up to 0.75%
discretionary
8.3 • Right to nominate a
director
• Terminates when
voting rights of each
principal shareholder
falls below 10%
6 + 0
13 Nov Merlin
Entertainments
plc
Leisure &
Recreation
KIRKBI;
Blackstone
Group; CVC
Capital
Partners
3,193 957 79 15 66 Goldman Sachs;
Barclays Bank;
Citi; Morgan
Stanley; HSBC;
Unicredit; Lazard
& Co
1.25% plus up to
1% discretionary
35 • Certain voting and
non-solicit undertakings
• Certain anti-dilution
protection
• Right to nominate 1
director whilst voting
rights above 10%
• Terminates when
a significant shareholder’s voting rights
fall below 5%
6 + 0
(and a separate
orderly sale
agreement
between
significant
shareholders and
company)
15 Nov Just Retirement
Group plc
Financials Avallux 1,125 343 13 11 62 Deutsche
Bank; Nomura;
Execution Noble;
Keefe, Bruyette &
Woods; Panmure
Gordon
1.5% plus up to
1.5% discretionary
20 • Certain voting undertakings
• Right to nominate 1
director
• Terminates when
voting rights fall
below 15%
6 + 0
20 Nov Infinis Energy plc Utility &
Energy
Monterey
Capital
780 234 100 -0.6 69 Barclays Bank;
Deutsche Bank;
RBC Capital
Markets; Kempen
& Co; Liberum
Capital
1.5% plus up to
1.5% discretionary
15.7 • Certain voting and
non-solicit undertakings
• Right to nominate 2
directors whilst voting rights above 30%,
otherwise 1 director
and 1 observer
• Terminates when
voting rights fall
below 10%
6 + 0 Date Company Sector Private
equity
sponsor
Market
cap at
IPO
(£m)
IPO size
(£m)
1
Sell
down as
proportion
of IPO
2
(%)
Price
change
since
IPO
3
(%)
Aggregate
sponsor
retained
stake on
IPO
4
(%)
Banks Commission/fee
structure
Total estimated
expenses
(including
commissions)
(£m)
Relationship
agreement
5
(key terms)
Sponsor lock-up
+ orderly market
periods
(months from
IPO)
AIM
14 Feb Digital Globe
Services Ltd
Support
Services
The Resource
Group
47 13 61 40 44 N+1 Singer 4% plus up to
1% of market cap
(discretionary)
plus 0.5%, 5 year
warrant
1.2 • Certain voting restrictions and standstill provisions
• Vote to ensure at
least 2 independent
directors and right to
nominate 1 director
• Terminates when
voting rights fall
below 30%
12 + 12
28 Jun IBEX Global
Solutions plc
Support
Services
The Resource
Group
58 14 26 38 75 Liberum Group;
Cenkos Securiites
5% plus a
corporate finance
fee (undisclosed)
1.3 • Certain voting restrictions and standstill provisions
• Vote to ensure at
least 2 independent
directors
• Terminates when
voting rights fall
below 30%
6 + 18
31 Jul Conviviality
Retail plc
Retail ECI Partners 66 64 48 81 0 Zeus Capital; Oriel
Securities
£250,000 plus 4%
plus 2%, 10 year
warrant
4.24 N/A N/A
20 Nov Bonmarché
Holdings plc
Retail Sun Capital
Partners
100 40 100 41 52 Investec Bank £200,000 plus
2% plus 0.5%
discretionary
1.5 • Right to nominate a
director and observer; right to appoint
chairman above 30%
voting rights
• Terminates when
voting rights fall
below 15%
6 + 9 Date Company Sector Private
equity
sponsor
Market
cap at
IPO
(£m)
IPO size
(£m)
1
Sell
down as
proportion
of IPO
2
(%)
Price
change
since
IPO
3
(%)
Aggregate
sponsor
retained
stake on
IPO
4
(%)
Banks Commission/fee
structure
Total estimated
expenses
(including
commissions)
(£m)
Relationship
agreement
5
(key terms)
Sponsor lock-up
+ orderly market
periods
(months from
IPO)
20 Nov Applied
Graphene
Materials plc
Chemicals IP Group
plc; Top
Technology
Ventures;
Northstar
Ventures
26 12 8 151 45 N+1 Singer £703,500 fees
and commissions
paid by Company;
plus 2%, 5
year warrants;
sellers paid 4%
commission
1.1 Not disclosed 12+12
28 Nov Eclectic Bar
Group plc
Leisure &
Recreation
Avanti Capital 21 15 30 4 0 Panmure Gordon 4% and corporate
finance fees
(undisclosed) paid
by company; 2.3%
paid by seller;
0.5%, 2 year
warrant
1.4 N/A N/A
