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Private equity exits via London IPOs in 2013

Squire Patton Boggs

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United Kingdom February 26 2014

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

Squire Patton Boggs - Matthew Doughty and Tim Hewens

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