Institutional investors underline importance of IPO preparation
Monday, 11 March 2013 — A new EY survey has underlined the importance of preparation and planning for businesses considering an Initial Public Offering (IPO).
More than 300 institutional investors around the world, including Australia, were surveyed for the report, Right team, right story, right price.
Institutional investors ranked attractive pricing (91%), a compelling equity story (65%) and confidence in management (57%) as the top three critical success factors for an IPO.
EY Oceania Transactions Advisory Leader, Graeme Browning, says an increasing number of businesses are considering listing but he warns the bar will be high for the first IPOs of this cycle.
“There is increasing confidence the IPO window will open in Australia this year. While history suggests there could be a pull back at some point in the strong equity market run we have seen in the past nine months, the growing confidence in the global economic outlook, reinforced by a solid earnings season during February, is conducive to the IPO window opening,” says Browning.
“However, the first companies to test the market will need to be well priced, well prepared and able to demonstrate a predictable earnings stream.”
Browning says for this reason preparation and planning will be even more important for IPO candidates this year.
“It is easy to underestimate the strain an IPO can place on a business and its management team,” he says.
Notable findings in the EY survey of institutional investors included:
- The top three factors most likely to improve IPO market sentiment are brighter corporate earnings outlook (64%), stabilisation in macroeconomic conditions (52%), and stabilisation in equity markets (47%).
- The three most important financial factors for evaluating an IPO are earnings ratio (45%), cash flow (42%) and ROE (18%).
- The three most important non-financial factors are management credibility and experience (30%), market size and opportunity (26%), and brand strength/market position (20%).
- The most important areas of a company’s infrastructure when preparing to go public are the financial reporting system (80%), corporate governance and compliance (79%), and risk management and internal controls (71%).
- The top three key concerns about IPO candidates were overpricing of stock at IPO (85%), the issuer not having the right management (56%) and listing at too young or too early a stage in a company’s life cycle (43%).
Browning says there will likely be a small number of IPOs in Australia before 30 June, with a bigger window likely to open in October and November, assuming the economic outlook and equity markets both remain stable.
“Companies thinking about an IPO need to be preparing now. In our experience, companies often underestimate how long it will take to prepare for an IPO – it is at least six months, with the better prepared companies spending 12-24 months getting ready,” he says.
Businesses considering an IPO need to undertake a long-term transformational process that encompasses the management team, board and governance structures, systems and processes and investor relations and communications.
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