“I used to encourage companies to list on the ASX. Now, the case for smaller companies listing is slim for all but the most suitable candidates”
Current market dislocation is driving growth for certain businesses and bringing alternate corporate pathways into focus. In my a 30-year capital markets experience, I’ve identified four key observations for directors, management and shareholders considering a listing, private equity or trade sale.
4 Key Insights when considering a public listing
1. ASX is no longer the natural home of small cap growth stocks
Historically, the absence of venture funds in Australia and the speculative history of the resource sector, morphed the ASX into a growth exchange, providing capital and liquidity for companies at an earlier stage than any other exchange in the world.
This distinguishing feature is now diminished, through higher regulatory standards, policy changes, and higher expectations by investors, based on previous market failures. Investors’ appetite for profit remains strong, but the tolerance of failure is low, by both the market and regulators.
2. Access to capital at what price?
Public markets are excellent vehicles for raising capital and providing liquidity for larger companies and higher growth firms with predictable businesses. However, through a perceived lack of other options or exuberant advisors, small companies still list on the ASX, earlier than most other bourses in the world.
A listing is the ‘starting line’ for scrutiny and judgement and should not be the ‘finish line’ for smaller companies seeking funding. When corporate results in the transparent world of continuous disclosure vary from expectations, investors reactions are exaggerated. If companies outperform, valuations are often overshoot fundamentals, but when results fail to meet expectations, investors will punish the share price and companies can sink into the illiquid mire of ASX oblivion.
For companies without a track record of profit, escrow conditions will restrict founders’ ability to sell-down and crystalise a capital gain.
3. What astute public market investors look for?
No CEO has finished an IPO process and said that was fun! It is uncertain, expensive, time-consuming, distracting and stressful. Organisational maturity, a strong operating outlook and reason to leverage public markets are essential.
The assessment criteria (other than for resource companies) is consistent across astute investors. It includes positive and growing cash flows, or an innovation pathway, understandable business models in attractive markets, and faith in the honesty and capability of management.
Smaller companies that may not quite meet these standards are sometimes offered a reverse listing on the ASX. Having advised on many listings, including the first RTO of the dot-com period, it is clear that RTOs are not often an attractive pathway. Changes to listing rules mean that unless the ‘shell’ is in the same business and a similar scale (with strategic, synergistic or funding advantages), the listing requirements and challenges are the same as for an IPO.
4. Preparation must examine private equity and trade sale
Advice for companies looking for a value event is that long-term preparation should deliver the best result. There is an adage amongst Venture Funds that an exit plan should be in place at the point of investment.
My experience in both venture capital and corporate advisory underlines the importance of objective analysis of alternative liquidity or funding points, work to a preferred plan, but maintain flexibility for competing corporate transactions.
An evaluation of a listing path should go beyond the ASX, including the London Stock Exchange and its AIM market, Singapore (and Catalist), Nasdaq, Toronto and Hong Kong bourses.
Private companies continue to hold their relevance and value to Trade and Private Equity acquirers. While some bidders have temporarily taken a step back to interpret the implications of COVID-19 across business sectors, the market dislocation is creating significant opportunities for private companies to attract the attention of strategic partners, trade buyers and private equity investment.
It is important for private companies to create competition between strategic and PE buyers as this impacts valuation and deal structure, and gives sellers the choice of ‘culture’ that they think will be best for their business and staff. Appoint an advisor with a global perspective, and not tied to a particular market strategy.