How businesses can be ready for an opening in the IPO market

For the past few years, there’s been little appetite on the part of investors – institutional or retail – for backing the debut of a company onto the Australian Securities Exchange, known in market lingo as its initial public offerings (IPOs).

This year, this state of affairs hasn’t been helped by a few false starts. There was a fair amount of speculation chicken company Ingham Enterprises would list this year,  but instead it was bought out by private equity at the weekend. And among the companies that have braved the sharemarket, there have been some terrible high-profile outcomes, such as Facebook in America, which has fallen from a listing price of $38 to $28 (at worst it was $19 in August 2012). 

But institutional investor sentiment is changing, according to new global research from accountancy giant Ernst & Young. The report, released yesterday, found institutional investors are increasingly willing to invest in IPO stock, and have been doing so at far higher rates over the past 12 months.

More than four in five (82%) of the 300 institutional investors surveyed – investment banks, super funds and other financial institutions – have invested in an IPO over the past 12 months – up from less than one in five (18%) when Ernst & Young did the same survey last year.

The data was global, but Ernst & Young Oceania transactions advisory leader, Graeme Browning, says this holds out in Australia as well. He says this is highly encouraging for companies looking to list in the next few months.

“For an IPO to be successful, you need both institutional and retail investors,” he tells LeadingCompany. “Many retail investors will watch to see whether an IPO is well-supported by institutional investors as part of their due diligence on whether to invest or not. Likewise, institutional investors like to know their stock is well-supported by retail investors. Both need each other, I suppose.”

One outcome of the dearth of IPOs in the past four or five years has been a build-up of companies keen to list that have been waiting for the market to thaw, Browning says.

“The interest is high – there’s a lot of talk about IPOs in the market, especially given equities have been so strong.”

These companies could now have a chance, given many analysts are predicting the market for IPOs in Australia will “open” from October this year.

But the appetite for new IPOs may not last long; it’ll depend on how successful the early movers in the Australian IPO market prove to be. “It could be a short burst, or a longer opening. The best companies will be ready to go public when the window does open,” Browning says.

“Do you want to be the first or last in a particular cycle? Well, that depends on whether or not you’ve done the hard yards yet. My advice to clients is not to go public too early. You need to invest time so that when you do go public, you’re ready for it.”

IPOs take a long time to plan for, meaning those who are ready to go later this year will have been preparing for months. Some companies take up to two years. This isn’t surprising when you consider all the things that need to be done to get a company ready for listing.

“In my experience, companies tend to underestimate how long it takes,” Browning says. “Running a good business as a private company, plenty of people think moving to a public company should come pretty easily. But it rarely works smoothly.”

The IPO itself can be highly distracting for management teams, not to mention employees. It takes months to prepare a prospectus and talk it through with potential investors. And that doesn’t stop once a company goes public. Instead, this new outward focus becomes the norm for the business.

Public companies also have to produce financial information in far more detail and far more regularly than private ones, which can take time to build into business operations.

An IPO checklist: What you need to succeed

• The institutional investors Ernst & Young surveyed were asked what parts of a company’s infrastructure they placed the most importance on when investing. They nominated the company’s financial reporting system (80%), robust corporate governance and compliance (79%) and well-developed risk management systems and internal controls (71%).
• Asked what were their top three concerns, the institutional investors answered the overpricing of stock at an IPO (85%), the issuer not having the right management (56%), and companies listing too young or too early in their life cycle (43%).
• Asked how companies could know if they’re at the right stage in their life cycle to list, Browning said that while there should still be further growth to come, companies should also be able to demonstrate revenues commensurate with similar companies they will be compared to. The company also needs to have the internal systems and management team in place to sustain further growth, as well as a robust business model able to account for different risks. 

Source: Ernst & Young, Right team, right story, right price.