So you want to list your company…
Don't list for the sake of listing...
There are many merits to taking a company public – prestige, a sense of accomplishment, the publicity and glamor that comes with it, and also the ability to further raise capital from subsequent offerings. Behind the 400-page prospectus of legal disclosures and marketing taglines are hours of laborious work invested by an army of bankers, lawyers and accountants.
Despite the tedious process of taking a company public, many shareholders insist on taking this route. On average, nearly all IPO bankers commit to a timeline of 6 to 12 months, subject to regulatory approvals and customary due diligence being in place. In reality, this process takes somewhere closer to 2 years and in some cases even up to 4 years.
The costs of going public is more than you think. According to a survey conducted by PwC, more than 80% of CFOs commented in a survey that the one-time expenses relating to an IPO were in excess of USD 1 million – these are costs relating to the engagement of legal counsels (both onshore and offshore), accountants, commissioning a market study report, the book building process (gathering investor demand) and other miscellaneous expenses.
These costs also vary according to the complexity of the company structure and the readiness of the company in terms of being compliant with regulatory requirements from the authorities. All these excludes the underwriting fees charged by banks which are typically 6-7% of gross proceeds raised.
As an example, the listing of e-commerce company Y Ventures on the Singapore Catalist last year in July 2017 grossed in approximately SGD 7.7 million in proceeds, of which SGD 1.7 million (more than 20%) went to listing expenses. While this could be a unique case given the incredibly small size of the offering, average costs for public offerings of up to USD 100 million were anywhere between 7 to 30% of total proceeds raised.
This number comes down to between 4.5 – 9.0% for deal sizes of between USD 250 to 500 million and 2-3% as we approach the billion-dollar mark, which is fairly in line with market practice of advisory fees being 2 to 8% of transaction size.
Post IPO expenses – not something to overlook. Oxford Economics estimates that at least USD 1 million of additional costs annually are required to maintain a public company. The largest part of this goes into a more robust accounting and auditing process, but there are also additional resources that are required to be put in place such as investor and public relations, information technology and internal staffing costs amongst others.
To put this in a financial perspective: If your company is performing at an annual run-rate of USD 50 million, this will put a dent of at least 2% in your net profit margin every year.
Most companies are just not functionally ready. Most companies do not have the necessary resources for executing a stock exchange listing. For most, it is also probably the first time they are taking a company public. Shareholders and management try to do a number of things to compensate for this gap – including hiring full-time senior professionals who have prior experience in capital markets (usually ex-investment bankers), assembling a team internally to execute the transaction and conducting a beauty parade to select the best bankers and lawyers to lead the process.
On the surface on it, the deal could look well-orchestrated with an international line-up of the top firms. However, this usually results in an intricate mesh of numerous professionals with somewhat polarized personal agendas leading to overburdensome workload on the company’s management and IPO team as they try to coordinate the various working parties. If not handled well, this additional workstream will create undue stress on the operational team which should be focused on the day to day workings of the business.
Bottom-line. If you are a small to mid-sized company with a great product, solid business model, fantastic equity story and looking to raise capital for expansion, you are better off working with a strategic partner such as a private equity or venture capital firm who could potentially be more helpful in growing your business and sourcing for capital.
If the IPO roadmap is something you must take, work closely with a trusted advisor right at the onset to minimize the need for mobilizing too much company resources and reduce decision fatigue for senior management and key stakeholders. As key issues in the IPO process get progressively resolved and transaction starts to take shape, the company can still onboard more banks to execute the book-building process.