“We must take the current when it serves”
December 01, 2014
“There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.”
As a classicist and a regular theatregoer, it was only a matter of time before I turned to Shakespeare’s Julius Caesar for inspiration in this blog. Those who spend long enough doing business in the mean streets and offices of the City of London may feel a certain sympathy with its protagonist: at one moment in absolute command, at the next cut down in brutal fashion by those he had most trusted.
IPO timing – what really matters?
The speech I quoted by Brutus seemed pertinent as I considered a topic which has been the subject of a number of my recent conversations with potential issuers, namely how to plan the timing of their initial public offering (IPO). In many cases companies are coming to their financial year end and their owners are now looking to plan a deal in the second half of 2015; in some cases, particularly for regulated industries, the timing of the UK general election is very relevant.
There are a host of complexities in each individual case. Indeed, readers of this blog who have been baffled by bankers’ rather intricate “IPO Windows” and timetable slides will have had first-hand experience of that complexity. However, it strikes me that there is a broad approach to IPO timing which is intelligible and which generally holds true.
Start with the business
In my view the starting point for timing considerations must always be the development of the business to be listed, and the track record which can be demonstrated at the time of IPO. What is the progression in revenue and profit which will be shown in the IPO disclosure? If there are new growth drivers, how much evidence will there be of success or proof of concept when marketing to investors? What is the degree of confidence as to the revenue growth in the next few years? There are host of other questions that an owner or management team could ask, but my point is really to focus on the equity story in the business as a priority, before factoring in some of the other more market-centric considerations. When will you have an investment case which gets you value and convinces investors of the future potential to outperform?
Establish the parameters
Having formed a view as to what is right for the business case and equity story, the next step is to establish the parameters with respect to delivering the required disclosure. The starting point is which period you will report (most often full year or half year) and when those numbers go “stale” – in the UK for example that is six months after period end. A further nuance is that almost every UK or European IPO will be marketed to US investors – doing this requires private comfort to the underwriters which goes stale 135 days after period end.
These requirements address the latest possible timing of the IPO off a given set of disclosure, but of course the earliest possible timing will be governed by how quickly numbers can be produced and audited. That can be the subject of a rather lively three-way discussion between private equity owners, finance directors and reporting accountants. It is no surprise that the discussion should be lively: owners are rightly keen to avoid any unnecessary exposure to market volatility; finance teams are conscious of the work required to produce the numbers to a tighter than usual timescale. The guiding principle should be to come to a timetable which is tight but deliverable, and which gets “buy in” from all parties.
Consider the market factors
Sometimes it will be clear that the market is “closed” to IPOs and likely to remain so for some time; but more often there is a more nuanced judgement as to if and when the market is going to be receptive to an IPO at an acceptable valuation.
There are some obvious seasonal points to factor in – investors start to close their books for year-end around mid-December, for example, and Europe is generally closed in August. Other holiday dates need to be factored in, with US holidays such as Labor Day to watch, so as to capture the all-important US investor demand. Elections need to be taken into account, such as the UK next May.
Then it is a case of forming a view as to markets and the outlook for the peer group which, in most cases, will have a decisive influence on the valuation. Issuers need to take a measured and dispassionate view on this. I knew one CEO for example who had a Reuters terminal installed on his desk during the IPO preparation: having been at the other end of the phone, I would not recommend that for the blood pressure. What is important is to be clear as to the assumptions behind bankers’ “pitch valuation”, and to be able to hold them to account.
Get ready to “take the current when it serves”
Being able to act decisively, to “take the current when it serves”, depends on being ready. That means taking an objective and thorough look at all aspects of the business through the lens of public company requirements, and starting to address any gaps. Some of these are long lead-time items where issuers sometimes underestimate the difficulty – filling non-executive board roles is a good example. Even where an IPO may not be the only potential outcome, an IPO readiness exercise can be a useful catalyst to bring up overall standards of corporate governance.
Are you currently going through the process of planning the timing of an IPO? Do you have different views on the most important priorities for doing so? Do you struggle to reconcile the business imperatives and the technical considerations? Feel free to leave a comment or, if helpful, to schedule a meeting with the Equity Advisory team.