The IPO: Evolve or Die
Since the start of 2019, the initial public offering (IPO) market in London has borne resemblance to a desert – very few signs of life, baring the occasional tumbleweed of a big listing – such as Trainline and Network International.
The total value of IPOs in the London market in the last two years has dropped dramatically from levels seen in previous years, with the exception of 2016 when the market was spooked by the shock Brexit vote, according to Bloomberg data.
2019 was a particular lowlight with just 35 IPOs completed. The market was weighed down by the fractious Brexit negotiations and persistent threat of no-deal, and more recently, it was halted by the Covid-19 pandemic.
However, in recent months, there have been signs that the IPO market is picking up again. There has been a global boom in technology listings, with Palantir and Snowflake both floating in the US with multibillion-dollar valuations. Meanwhile in London, The Hut Group made its stock market debut in September to become the UK’s largest ever technology IPO and the largest London IPO since 2015.
It is too early to tell whether the current resurgence will last long. But it is a good point to pause, take stock and evaluate the IPO market in its current guise.
It would be naïve to state that macro threats have been the only thing stopping companies from pursuing an IPO in the past. Uncertainty in the market is a fact of life – if it is not Brexit, then it is the US election, if it is not the election, then it is the oil price.
We need to look at the companies themselves to understand their reluctance to IPO. In the past decade, companies are choosing to IPO much later in their lifecycle. In the US, the average age of a firm listing in 2020 is 11, but in the 1990s it was eight.
The increasing availability and relative ease of raising money privately has meant that fewer companies feel the need to float. If you add into the mix the added layer of scrutiny that comes with public life, the strict corporate governance requirements – especially in London – and the sheer cost and time of an IPO, then it is easy to see why companies are choosing to stay private for longer.
The traditional IPO is a less appealing prospect than it once was, and in response, many companies have taken alternative approaches to public offerings.
The rise of the direct listing, especially for technology companies in the US, is the clearest emerging trend. With a direct listing, companies sell existing shares without an underwriter, as opposed to the method of a traditional IPO where a company sells new shares to the public which are underwritten.
In the last couple of years, there has also been an increase in the number of companies listing via a special purpose acquisition company (SPAC). A SPAC is a company with no commercial operations which is formed to raise capital through an IPO for the purpose of acquiring an existing company.
Nowadays, companies want to maintain more control over both their business and the IPO process. By pursuing direct listings or SPACs, they are less beholden to market sentiment.
Control was a key theme in The Hut Group IPO. The IPO included a founder share, designed to prevent unwarranted takeovers and incentivise the founder to deliver strong growth rates to the benefit of shareholders. Founder shares are more common in the US and it was initially met with skepticism by certain parts of the UK media.
But if we want to lure entrepreneurs to float their companies in London, then the traditional IPO must evolve to allow them a greater degree of control over the process and their publicly listed company than we have in the past.