IPO Eye Q2 2013

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  • The future of AIM
    London’s junior stock exchange is now old enough to vote in general elections! In its lifetime to date, it has seen a high proportion of international companies, and in recent years an increasing dominance of resource companies. We explore the evolution of AIM and what the average company looks like today. Read more.
  • The importance of good governance
    Governance levels at listed companies are coming under increased scrutiny and shareholder activism is increasing. We explore what companies need to do in order to adhere to governance guidelines. Read more.
  • Location, location, location
    The globalisation of financial markets has meant that many businesses are open to going public on exchanges outside their domestic market. We look at why location is the hot topic for budding IPO candidates and what companies may wish to consider when shopping for a market. Read more.

The future of AIM

London’s junior stock exchange is now old enough to vote in general elections! In its lifetime to date, it has seen a high proportion of international companies, and in recent years an increasing dominance of resource companies. We explore the evolution of AIM and what the average company looks like today.

On 19 June 2013, AIM celebrated its 18th anniversary. It started in 1995 with just 10 domestic companies. Since then, it has seen over 3,000 admissions, including 600 international admissions, reaching a membership peak of 1,694 at the end of 2007.

Since 2007, AIM has seen a significant decrease in membership, with 1,087 members at the time of writing. Whilst there is a natural amount of shedding by way of delistings every year, as some companies graduate to the Main Market and others are subjected to reverse takeovers, difficult economic conditions in the past five years have played a large part in reducing new admissions and increasing delistings.

Many companies listed during the boom period but could not survive the recession. The recession also afforded opportunities to venture capitalists, private equity firms and large corporates to acquire small AIM-listed companies.

Figure 2: AIM Companies Member listing: 2001 - 2013

AIM Companies Member Listing: 2001 - 2013 (source: London Stock Exchange)

As the chart shows, delistings rose from 2007 to 2009, at the same time as new admissions dropped, and the global economy began to slow. However, in the last two years, delistings have started to stabilise, as AIM’s remaining companies seem strong enough to prevail in the current economic conditions, and the number of listings has also shown signs of increasing.

Figure 3: AIM sectoral split (Dec 2007)

AIM sectoral split (Dec 2007)

Source: London Stock Exchange

Figure 4: AIM sectoral split (May 2013)

AIM sectoral split (May 2013)

Source: London Stock Exchange

The last five years have also seen a moderate change in AIM’s sectoral balance – mainly from financial services-dominated to more resource companies-driven. As the above chart shows, since 2007 the number of resource companies (mining, oil and gas, utilities) has increased from 21% to 30%. Comparatively, the number of financial services and investment companies, hardest hit by difficult economic conditions, has decreased from 23% to 20%. Other sectors have decreased but generally maintained the same market proportion.

The majority of companies on AIM continue to be relatively small; the proportion with a market capitalisation of over £50m remains in the 25-30% range. In December 2007, this was 29%, and at the end of June 2013, 25%. Similarly, the proportion of international companies on AIM has remained at 20%.

The UK Government continues to incentivise AIM listings, and recently abolished stamp duty on AIM shares from April 2014 onwards. Among other measures, it is also proposing to allow individual savings accounts (ISAs), which are the UK’s most popular tax-efficient schemes, to hold AIM shares.

The last five years have seen AIM’s sectoral balance shift from being financial services dominated market to a more resource companies-driven one.

Since 2011, the number of delistings has started to ‘bottom out’ and stabilise, as the remaining companies on AIM seem strong enough to prevail in the current economic conditions, whilst the number of listings has also shown signs of rising.

The importance of good governance

Good corporate governance has always been important for companies and investors, but recent widespread coverage of problems at a number of listed companies has pushed it sharply up the corporate and wider agenda.

A Premium Listed company must comply with the UK Code of Corporate Governance which, together with the Listing Rules, DTR and UK company law, forms the governance framework for listed companies.Companies with a standard listing, which are required to meet EU minimum admission criteria, are subject to less comprehensive standards of disclosure and stakeholder rights. AIM companies are encouraged, as a minimum, to adhere to the Quoted Companies Alliance guidelines, which are based on the Code but tailored to their needs.

The Code operates a ‘comply or explain’ principle. In 2012, approximately 50% of FTSE 350 companies claimed to be fully compliant and a further 29% complied with all but one of the Code’s 48 provisions *. The data also suggested that compliance rates amongst FTSE small cap companies are consistent with those for larger companies. 

Governance levels at listed companies are coming under increased scrutiny and shareholder activism is increasing.  There are also a number of changes coming in the next few years. In addition, there are calls for FTSE Index companies to be fully compliant.

Early consideration of governance issues is therefore key for a company looking to list.  In particular it should focus on:

  • Identifying and understanding the specific requirements of its proposed listing route
  • Deciding on its governance structure and board composition
  • Making sure the business is adequately resourced from day one
  • Balancing the focus on the transaction with day-to-day governance and risk management.

It is highly recommended - and best practice - for companies to bring non executive directors on board early in the IPO process.

Governance is not a just a box to tick, it should be embedded in an organisation’s culture.  Being able to demonstrate that a business operates ‘like a PLC’ pre IPO helps investor confidence and ultimately adds value.

*  Source: Grant Thornton Corporate Governance Review 2012

Governance is not a just a box to tick. Demonstrating that your business operates ‘like a PLC’ pre IPO helps investor confidence and ultimately adds value.

Location, location, location

London is the world’s most international stock exchange, attracting business from around the globe.  NYSE and Nasdaq have long held an attraction for technology businesses wherever they may be based.  It is still the case though that most companies choose their home market for their primary listing.

However, with the globalisation of financial markets, continued growth in emerging economies and the level of competition between exchanges increasing, we have seen significant interest from clients representing a whole range of sectors looking to evaluate the benefits and risks of listing internationally. Indeed, there are many recent high-profile examples of businesses going public on exchanges outside their domestic market – Manchester United, NMC Healthcare and Prada to name a few.

In our view, companies should evaluate the different options available regarding potential exchanges. This can be best approached from two perspectives –national and sectoral.

The national perspective

A company’s home market is often regarded as the country where it has its principal operations and in which it is, usually, incorporated. This is where companies usually go public, and where investors expect the listing. A company is intimately linked to the economy, culture, infrastructure, technology base and taxes of its home country, and committed to its relevant capital market regulations.

The sectoral perspective

However, a company can also be said to be at home in a market where people best understand and evaluate its business model. The marketplace where many comparable companies are listed, which has sector specific analyst expertise and attracts investors in the sector, can also therefore be regarded as a company’s home market.

In determining which market is right for your company, in our opinion, four overriding factors  require careful examination:

  • Motivation and strategic goals
  • Valuation and market infrastructure
  • Stakeholder preferences
  • Costs, both initial and ongoing.

Other factors motivating companies to go public outside their home market vary according to their country of incorporation, but include regulatory requirements, uncertainties regarding the listing process and waiting or processing times during the approval of its prospectus and the registration of the securities.

Selecting the right capital market, stock exchange and listing segment enables you to determine the regulatory requirements your company will have to meet.

In the run-up to going public, your company’s internal structures (legal, tax, organisational) and units (management, accounting, IR) have to be checked and prepared to meet the relevant requirements.

These measures are essential to maintain the profile of a listed company and meet investors’ and regulators’ requirements. The first key steps in this phase involve determining the appropriate capital market strategy and achieving internal capital market capability.

EY has a deep understanding of global exchanges and can help you evaluate your listing destination, and, whether your listing is far from your company’s country of incorporation or closer to home, our experienced professionals will be happy to provide you with on-site support as you take the journey to life as a public company.

All companies should spend time evaluating the different options available regarding potential exchanges. This evaluation can be best approached from two perspectives — the national and the sectoral.