Going public: Flotation gives access to capital but has other benefits

For some ambitious business owners the ultimate goal is to float on the stock market through an initial public offering (IPO). Many Irish companies have followed this path with great success over the years. These include CRH; Flutter – formerly Paddy Power; the Kerry Group; Kingspan; Glanbia; and a legion of others. These companies have sought a public listing for a variety of reasons, principally access to capital.

“The main benefit for a company floating is that it provides permanent equity capital and a base to continue to raise capital to fund growth and for acquisitions,” says Piers Coombs, head of the Goodbody London office.

“There are plenty of other subsidiary benefits, such as providing liquidity for pre-IPO shareholders, a currency to incentivise staff, a higher profile for the business and potentially cheaper debt from lending banks due to the higher quality covenant of being listed. But the biggest benefit of all is the permanent capital base. It stands out in particular contrast to private-equity funding, whose business model relies on selling on a three-to-five-year cycle, or relying on debt financing which can be quickly turned off, as in the global financial crisis and Covid-19 pandemic.”

Deloitte partner Ian Whitefoot agrees that access to liquid pools of capital is the principal reason for going public and points to some of the other subsidiary benefits.

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“There is the cash-out for existing shareholders but this is not necessarily the most important reason,” he notes. “Existing shareholders tend to cash out 10 to 25 per cent of their holdings. New investors would tend to baulk at anything higher than that. There are also benefits in terms of the incentivisation of employees. You can do innovative things around share compensation. If it is structured properly and proportionately it can drive dynamism in the business.”

A wide variety of companies can avail of these benefits. “The beauty of the stock exchange is that it is such a broad market and almost any company is suitable for listing,” says Coombs.

“There are barriers for some that might particularly struggle with environmental, social or governance concerns. But public markets are pure price-discovery mechanisms and if the price is right investors will look for the opportunity to make good returns.

“Companies that have a clear trajectory for sustainable growth – and that can demonstrate how additional capital raised at IPO will accelerate that growth – are likely to be seen as higher quality and attract the most attention and best valuation multiples.”

Of course, size does matter. “There are a relatively small number of investors who target companies with values below €100 million,” says Coombs. “But that doesn’t mean companies smaller than this shouldn’t float. There are plenty of FTSE250 companies now who had a smaller market cap than this at IPO 10 years ago.

“But liquidity is an important consideration for investors in their decision-making process and companies that have a market cap and, crucially, a free float – the proportion of their share register that is free to trade – of greater than €250 million will attract a wider group of institutional investors.”

Whitefoot believes quite a few Irish companies are ready for an IP. “The Irish market is interesting,” he says. “We are getting a much larger population of companies in the market which are suitable for IPOs. They are now at a scale where moving between Irish private-equity investors in not really an option. There is a number of different markets to choose from. The range of options is fantastic. We are talking to people about listing on the Nasdaq in the US at one end of the scale and the Euronext exchange at the other.”

But companies and their owners need to be ready for changes in legal requirements and their operating environment.

“The fundamental thing underpinning an IPO is the growth and equity story companies are selling to investors,” says Whitefoot. “Investors assume an inherent level of maturity on the part of the company. They need confidence that the company will deliver on its promises. And companies need a track record to demonstrate they can do that.

“Owners also need to have the bandwidth to deliver on the equity story without compliance being too big a burden. The executive team needed to run a public company is probably quite different to what is needed for a private one. There is probably a need for different skills and abilities.”

Owners also need to be prepared for the higher level of transparency and scrutiny that comes with being a public company.

“You need to make sure you can maintain the confidence of the investors all the way through,” Whitefoot advises. “Management teams can sometimes be surprised at the wider population of people having views on how they run the business. Then you have activist investors who can make executives’ lives a misery. A lot of time and resources needs to be devoted to investor relations.”

Coombs doesn’t believe this should act as a barrier to a stock market listing.

“Being a public company requires a high level of transparency in terms of reporting your financial statements and setting out your investment case and business model to investors,” he says. “Some management teams and owners have worried going into an IPO about the information this will provide to competitors, particularly those that are private and don’t have the same obligations. But in reality, it’s not at all obvious that this has held back the thousands of successfully listed companies with long track records of growing their business in highly competitive sectors.”