As financial headwinds give listed firms the jitters, going public still matters
Investment banks, advisors and shareholders all love companies being listed on the stock exchanges. Bankers make high fees on corporate activity, lawyers and accountants charge more to listed companies and shareholders secure access to a broader range of companies, with more secure governance than most private companies. For them, the incentives are clear.
But the benefits for executive teams are less obvious, especially in times of economic turbulence.
And it’s certainly true that being quoted is expensive in both time and money. Even for a micro-cap company (under £250m enterprise value), it can cost more than £300,000 annually due to the additional layers of audit, compliance and governance. The chief executive officer and chief financial officer need to invest valuable chunks of time too, on results roadshows with fund managers, twice a year for AIM or quarterly on the LSE Main Market.
And right now, access to capital, the primary driver for many, feels expensive or elusive, because the public markets are suffering and the IPO market is in deep freeze.
Liquidity can be an additional issue, certainly for micro-cap companies. Shareholders can’t always find buyers or sellers in sufficient quantities, when they try to trade. This can lead to volatility and is especially acute now with AIM down 33 per cent in the past year. According to Chris Boxall of Fundamental Asset Management: “When the market declines, open-ended funds can face redemptions which force them to sell, to return cash to investors, at the very time that low company values mean they should be buying. This can perpetuate an unhealthy selling cycle.”
There has even been a surge in companies who are delisting. Biffa, Micro Focus, Aveva and RPS are all companies at various stages of being bought out from the public markets.
But just because the route has less striking benefits, that doesn’t mean it’s not still the right one.
My company went public in 2017 after being backed by business angels, taking debt and considering private equity. Despite decent revenue growth – 35 per cent in the last year, a strong market position and successful technology, our share price is still below the IPO level. So it may be surprising that I remain a stock market enthusiast.
That’s because being listed can be, to adopt Churchill’s comment on democracy, the worst option – except for all the alternatives.
Debt, as a way to raise capital, looks expensive as interest rates remain high – and it creates risk; banks can be unreliable when you need them most.
Private equity firms usually require their investments to follow the value-creation timetable of their fund. Founders who crave autonomy (it’s why many set up their own enterprise) can be frustrated by that loss of control. And, while management can earn very well on a successful exit, the returns for executives can disappear completely when things go wrong. “Management incentives for listed companies can be more balanced, flexible and longer term than private equity alternatives,” said Michael Ansell of h2glenfern Remuneration Advisory.
Furthermore, a listed shareholding is better for small shareholders than owning part of a private company; and those holders often include the past and current executive team, as well as friends or family of the founders. Despite liquidity issues, smaller holders can usually trade quickly and cheaply. Better governance also means they benefit from the same level of information as larger shareholders and, in contrast to private equity backed companies, it is rare that a public company is controlled by a dominant shareholder who may push their agenda at the expense of other investors. So the extra costs can be worthwhile because, in a world of rising scams and a “fake it ‘til you make it” ethic in some private companies, the additional checks and balances of public life do protect shareholders – including management.
So, even in these dark days of low valuations and delistings, it does often make sense for the C-suite to keep the faith and look forward to market sentiment turning, to the benefit of those companies who stayed on-market.