Delivering long term growth

  • “Equity is the main form of long-term capital”

    Alexander Justham, CEO, London Stock Exchange

 

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When companies consider how best to expand their business, they are faced with a number of options. But listing on London Stock Exchange can provide the most rewarding long-term solution, as Heather Connon explains.

One of the most important decisions a company has to make is how to finance growth. There are a number of options, such as debt or private equity funding. But for long-term expansion equity is an appealing choice, either via an Initial Public Offering (IPO) or a secondary issue.

There are many advantages of a stock market listing. Unlike debt, equity does not have to be repaid and, while investors will eventually want to see dividends, they are willing to forgo income when the company is growing rapidly or goes through a difficult patch.

Private equity backers need to realise their investment after a number of years but share capital is permanent. Family-owned companies can take advantage of a public listing to resolve succession issues, while publicly-traded shares can help companies attract and motivate staff. A listing also gives companies a certain kudos with other stakeholders, such as suppliers and customers. And, having secured a share quotation, companies then have the option of raising more capital through a secondary issue, or of using their shares to make acquisitions.

Public equity is highly attractive to investors as well, offering an ideal way to tap into the growth of specific companies and thence the broader economy, both domestic and international.

It is therefore good news for ambitious companies that the IPO climate is warming after a difficult few years. The Royal Mail Group flotation in the autumn of 2013 was one of the largest and most successful since the start of the financial crisis with investors subscribing for seven times as many shares as were available. International companies are also returning to the London market.

“The pipeline of companies considering a stock market flotation is looking healthier than it has for some time,”says Raffaele Jerusalmi, Executive Director, Capital Markets at London Stock Exchange Group (LSEG).

Changing climate

For the last five or six years, volatile stock markets mean that those who bought shares in an IPO have too often been able to pick up the same shares more cheaply after the flotation. In recent months, however, more and more IPOs have traded above their offer price. ‘Investors are now feeling more confident about the future of the economy and so are more keen to invest capital in IPOs,’ says Jerusalmi.

That, in turn, is feeding corporate confidence, suggesting 2014 will be an active year for IPOs if the global economy continues its gradual recovery. IPO activity in London focused mainly on UK companies in 2013, as UK economic recovery was more advanced than elsewhere in Europe. From a long-term perspective however, London remains one of the most attractive destinations for international listings, with a large pool of investors, highly developed financial markets and a world-leading regulatory regime. It also has the advantage of operating in an internationally-accepted language.

“London is among the two or three venues which international companies will consider, whether for their primary listing or as a dual listing,” says Jerusalmi. The Milan bourse, by contrast, is more domestically focussed with IPOs largely drawn from within Italy. Both exchanges, however, benefit from a common platform, shared technology and the robust listing standards employed across LSEG.

Planning for an IPO is not, however, something that companies should undertake lightly: it requires careful planning and detailed preparation by management and advisers.“A public company requires a degree of transparency and engagement in the public arena which most private companies will not have been used to,” says Alexander Justham, CEO of London Stock Exchange.

“They will need to put in place the disclosure andgovernance requirements of the public market, to ensure that they act in the best interests of the wider shareholder community. The benefit of putting these structures in place is that it gives companies the ability to raise public capital relatively easily and relatively frequently.”

Public companies also benefit from brokers, analysts and investment institutions following their shares, recommending them and purchasing them on behalf of clients.

Help at hand

To help up-and-coming businesses, LSEG engages with those who are pondering a listing. The Group’s Primary Markets team spends considerable time marketing the attractions of IPOs at roadshows and seminars across the UK and abroad. Discussions are also held with chief executives and chief financial officers worldwide; and Justham says London Stock Exchange has a “long list” of possible flotation candidates. It is always though a neutral player in the process. Its role is to explain the mechanics of listing, the governance requirements and other such necessities. To help with the IPO process itself, companies engage their own brokers and advisers. Some firms worry that the process will be lengthy and cumbersome. But such concerns can be overdone.

“Some companies come to the market relatively quickly,” says Justham.

Businesses that have already been in private equity ownership for example, may already have the governance, reporting and transparency structures in place so they can satisfy the listing requirements comparatively easily. Others need longer to put the building blocks in place.

There is however a variety of options for firms considering a listing in London. On AIM the trading history and disclosure requirements are more relaxed than on the Main Market. And a listing on the Main Market can be either Standard or Premium; the latter adds the UK’s super equivalent rules, which are higher than the EU minimum, to the European listing code, while a Standard listing is available to those companies, from any domicile, who prefer to comply with the EU minimum requirements.

LSEG has recently introduced a new category. The High Growth Segment is designed to help mid-sized European companies access equity finance to fund their growth.

“Equity is the main form of long-term capital,” Justham adds. “When a company is looking to grow, it offers a solid base on which to finance that expansion. It provides the ultimate stability of capital a company Can have.”