Alternative sources of funding for those not ready for an IPO
A great number of businesses look into the possibility of an initial public offering (IPO) and never actually go public. The main reason for this is that there are other ways to raise large amounts of cash that are more suitable to certain operations.
Sure, offering your stock to the general public implies a certain level of confidence in your growth potential, but is your business really operationally ready for a public listing? And is an IPO the most effective way for you to raise the funds needed to allow you to fulfil your potential?
The process of listing itself is expensive (underwriting, legal and audit fees) and can take 9 months or more of preparation. Once listed, ongoing financial reporting and regulatory obligations are onerous and costly. There is often a loss of control from management to shareholders.
On the flip side, an IPO can provide great publicity and credibility, the proceeds of an initial private offering can be very high, and it also allows pre-float investors an exit route.
Below we take a look at the alternatives to an IPO and show you some examples of businesses that have opted for these alternatives and raised impressive levels of funding in the process.
Now, seeking funding from a private equity investor can either involve an investment or a sale. Some businesses conclude that the best way to secure the funding needed to significantly expand is to sell to someone who can afford to make that dream become a reality. A private equity sale should usually be considered as an alternative to an IPO.
A less drastic move would be to seek investment from a private equity partner. Attracting the right investor, who will offer strategic experience, knowledge and consultation services, probably as a new board member, can be a great move for a business on the brink of great things.
Orchard Therapeutics, an Anglo-American biotech firm, has just announced that it secured a further US$150m in funding to help develop its gene therapy work. The company acquired a list of rare disease medicines from GlaxoSmithKline just four months ago and soon after announced that it was considering an IPO.
Since then, it has instead raised a total of US$290m from a long list of PE investors and can now develop its life-changing drugs, possibly with no need for a public listing.
Selling to a trade buyer
Like a sale to a PE buyer, selling to a trade buyer can, in some cases, be the most sensible move when looking to ensure a business fulfils its growth potential. Business owners teetering on the verge of an IPO will often be won over by larger, successful operations that want to snap them up and grow them alongside the rest of their business portfolio.
This is the closest to an IPO without actually being an IPO. Indeed, it is often a precursor to an IPO.
Business owners who have nurtured their enterprise to the point that an IPO is on the cards can feel very proud of their achievements, but they need to ask themselves if their company is mature enough for a successful flotation.
Younger businesses may conclude that a public listing is simply not viable as they lack the robust financial history necessary to attract public investors. A close alternative is offering shares to a limited number of private investors, known as a ‘private placement’. This option also has the added bonus of not being subject to as great scrutiny from regulators as a full IPO.
For business owners who would like to raise over £1 million but want to retain the majority of their company, venture capital is an option. Whether the venture capitalists are individuals or firms, they are very selective about who they back, ‘who’ being the operative word as it’s often about the people. Venture capitalists will generally look to fund companies that show great promise and growth potential. They typically only take a minority stake, leaving the owner with overall control. Venture capital trusts are also a funding option for business owners who have less than £15m worth of assets.
Striking a strategic partnership, whereby a smaller enterprise teams up with a much larger business, can be a suitable alternative to an IPO in certain circumstances.
There are also joint ventures, which are similar but provide a more equal pairing where a separate legal entity is created as a result of the joining of two businesses. There are gains to be made in pairing up with other businesses and growth opportunities can arise as a result of having access to new technologies, new markets and fresh expertise, not to mention the investment that might come alongside the partnership and the opportunity to cut costs.
However, careful consideration must be given before embarking on such a deal, as the partnership could fall flat on its face where the two businesses have incompatible growth strategies and expectations.
Case Study - PSS HIRE
Warrington-based utilities and pipeline equipment provider PSS HIRE has announced a strategic partnership with flow-stopping solutions specialist WASK, which it says will enable it to expand and invest in its operation.
As part of the alliance, PSS HIRE will start to distribute WASK gas-flow stopping equipment, which will open up new markets to the business.
Ashley Bentley, PSS HIRE’s business support manager, explained: “With a dedicated sales force and new national distribution centre providing the service and stock levels to support both equipment sales and spares, it is hoped that the partnership will provide immediate benefits to both new and existing customers.
“Our new partnership will enable us to expand our product offering and further invest in the latest innovative equipment.”
One of the more recent additions to the list of IPO alternatives is crowdfunding. Far from being the reserve of tiny start-ups, crowdfunding is now used by SMEs and larger companies to fund expansions, often as an alternative to going public.
Glint is a great example. This gold trading fintech recently raised more than £1.6m in crowdfunding cash from over 1,000 individual investors, enabling them to invest in their expansion. The crowdfunding round went so well, in fact, that they extended it by a further few weeks due to the popular demand.
The tip here is to work hard to ensure there are investors lined up to place 30-40% of the target funds in the first week or two of the offering. No-one backs a slow-moving train. If the crowdfunding appeal does not reach its target by the due date, all funds raised must be returned to investors.
Although in theory refinancing could be an alternative to an IPO, it is usually somewhat of a last resort. Business owners may find that they can improve liquidity by restructuring debt or negotiating terms with lenders to the extent that existing stakeholders can remove themselves from an operation altogether.
As with crowdfunding, peer-to-peer lending is an increasingly valid means of generating major financing for expansion projects without the need for an IPO, or indeed, the involvement of any traditional financing institutions.
Concerns about a lack of regulation are largely unfounded as the Financial Conduct Authority began regulating the entire consumer credit sector in 2014 and passed a rule requiring all peer-to-peer sites to obtain full regulatory permission.
Listing shares on a stock exchange still carried with it a certain level of kudos and there will always be a place for public listing. However, owners of mid-sized companies who are primarily seeking funding to take their business onto the next rung of their growth ladder will almost always find that one of the alternative options works better for them and their stakeholders.
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