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An IPO is a transforming event for a company. The main benefits can include:
- access to a deep pool of equity capital to fund corporate growth and development
- providing a new form of acquisition currency – ie paper as opposed to cash
- partial or full exit from the company for private shareholders
- potentially cheaper financing instrument than debt
- raised profile for the company and its board of directors
- attracting and retaining the best management and employees through equity incentivisation.
AIM has proved to be remarkably successful for IPOs as over 3,000 companies have raised a total of over £33 billion since the market was created in 1995. This is largely the result of the regulatory framework and the large community of equity fund managers located in London who are willing to invest in the high-growth companies which typically characterise AIM companies. The role of a broker in this process is to source the potential demand for new stock at a valuation acceptable to the company.
The nature of the broker's work is multi-faceted and it is more accurate to view the broker as an intermediary with the fund management community, acting as a conduit of information from the company to the market and vice-versa, rather than simply as a fundraising function. Generating interest from supportive institutions is crucial to the success of any IPO but the relationship between the company and the market must be built over the long term. Support in the aftermarket is therefore essential to the ongoing success of the company as a publicly quoted entity. For example, the company may wish to raise further equity capital from the market in the future (known as a secondary fundraise) and the company's financial results and share price performance following admission will be crucial to its success. An IPO must, therefore, be viewed as only the first step in the relationship between a company, the market and its broker. The typical structure of a broker is illustrated on the page opposite.
Teams of analysts cover a number of London public companies, generally on a sector basis. They produce research notes and any updates to significant news flow which include their own forecasts of the company's financial performance and often include their view of what should be the target share price. They will also offer a recommendation whether the stock should be a 'buy', 'hold' or a 'sell' at the current trading price. These notes are distributed to in-house sales teams and traders and to external fund managers.
Equity salesmen speak directly to fund managers and provide research and trading ideas in order to generate demand for client and other traded stocks. The traders will deal on behalf of fund managers in the market at the most competitive prices.
The corporate broking team is responsible for the daily management of the relationship with the company and is its first point of contact. As it sits on the other side of the Chinese wall, it can receive price-sensitive information and discuss with the company the potential impact of an item of news flow (including financial results) or a transaction on the market's opinion and rating of the stock. The Nomad remains the company's first contact for all regulatory matters.
Raising finance essentially involves balancing the forces of supply and demand using the lever of valuation. The most important initial considerations will therefore concentrate on the valuation of the company and potential structure of the equity raise. There are always competing interests – such as those of existing shareholders retaining ownership, existing shareholders selling their shares and new shareholders investing in the company for the first time. For example, those existing shareholders aiming to achieve full exit at admission will want to achieve the highest valuation possible, whilst those investing for the first time will have the converse desire as illustrated in the diagram 'Valuation pressures'. The broker's pivotal role is performing this balancing act, providing initial advice on its perception of the most attractive valuation and structure to the market, followed by final advice subsequent to an assessment of the demand generated from meetings with potential institutional investors. In order to crystallise its initial views, the broker may choose to perform a limited amount of pre-marketing, presenting the story to a small group of investors with the potential to provide 'cornerstone' support for the fund raise. It should be appreciated that there must be general consensus from the company's owners on its future, approximate valuation and funding requirements before embarking on any public marketing exercise.
Once the requirements of the existing shareholders have been ascertained and the approach to the market agreed, the broker's next task is one of market education through the provision of research. Typically, AIM fundraisings at IPO are institutional offerings rather than offers to the wider public (which are more common for large IPOs of companies with highly recognised brand names). The broker will therefore seek to access funds from institutional fund managers who typically invest money on behalf of insurance companies, pension funds, banks, mutual funds, hedge funds and private clients.
In many cases, institutional investors will not be familiar with the company and the broker will educate them through the publication of a note by their sector specialist research analyst. This will set out the company's investment case in significant detail, positioning the company within its sector and providing financial forecasts and valuation guidance. This note is composed by the analyst following discussion between the company and the research analyst, but is typically produced independently from the company in order to preserve the divide of the Chinese wall and thereby have credibility in the market. In essence, to have any value to a potential investor the research must promote the views of the analyst rather than act as a marketing document produced by the company. The reputation of the analyst is therefore absolutely critical as he provides an independent endorsement of the investment case.
The research note will be distributed to potential investors by the broker's sales team who will draw attention to the salient points to promote the story. On the back of these conversations, they will arrange a roadshow of meetings between the company's management and potential institutional investors. These meetings typically last for approximately one hour, the first half of which involves the management team (usually CEO and finance director) taking the fund manager through a presentation compiled by the company with the assistance of the corporate broker. This sets out the investment case but will not usually have forecasts or valuation materials. The company will also provide the investor with a Pathfinder admission document, the regulatory document compiled by all advisers (discussed further in the 'Legal work and due diligence' chapter) which contains detail on the company's development, operations, financials and outlook. This roadshow is the main marketing effort; it puts investors and management face to face and is in most cases the point at which investment decisions crystallise.
The dissemination of research and construction of the roadshow by the sales team is a delicate process as it is essential that the meetings are only held with appropriate investors. The roadshow can last up to a month and requires commitment from management who give the same presentation up to six times per day. This takes them away from running the business and the broker must ensure that the company is marketed to an appropriate audience in order for this to be fruitful and drive demand for the offering.
Pricing is a continuous, dynamic process comprising full participation from the company. The sales team will have a constant dialogue with potential investors during the marketing period and feedback will be collated and communicated throughout the roadshow. Having derived feedback on demand and valuation from the roadshow, the corporate broker will recommend a final price and structure of the issued shares for the approval of the company. The aspiration is always to provide a sound base for long-term share price performance and this involves balancing the immediate benefit in maximising the issue price with the implications for longer-term share price performance.
Following a successful roadshow, there may be demand for more investment in the company's shares than was originally envisaged. Although this is a good problem to face, the company must exercise restraint and not accept more money than it can successfully deploy in a reasonable time period, which is usually taken to be 12 to 18 months. The company's intentions will have already been communicated to investors and to change these at the last minute could harm management's credibility. Furthermore, investors do not appreciate invested cash remaining untouched on a company's balance sheet as this affects their potential overall return. Equally, the temptation to inflate the issue price and therefore the company's valuation should be resisted as, in the future, the market will compare the valuation of the company to that of similar quoted companies in the sector and may well correct mispricing in the longer term. Management would then be left in the unenviable position of a portion of the company being owned by investors who have experienced share price underperformance since admission.
It is rare that demand results in the exact amount being raised at the precise valuation level initially envisaged. The role of the corporate broker is to recommend a price that will adequately balance the forces stressing the price whilst leaving sufficient demand 'on the table' to ensure healthy trading in the aftermarket: this is illustrated in the box 'Driving demand and valuation'.
As admission should be viewed as only the first step in the relationship between the company, the broker and the market; the broker's real work commences once the company is on AIM. It is essential for a company to maintain good relations with existing and potential investors to ensure support for long-term growth. As management time is considered best spent running the business, it is the broker's role to promote these relations through ensuring effective communication between the company and the market. The aim of the broker now is to strengthen and broaden the share register with investors who are supportive of the management's strategy through a disciplined sales and investor relations process.
Once a company is quoted on AIM, the corporate broking department manages the day-to-day relationship with the company, monitoring trading and providing feedback from the market, reviewing announcements and presentations and co-ordinating communication with the investor base. The corporate broker will also provide advice on market reaction to planned corporate actions, such as acquisitions, disposals, further fundraises and returns of capital.
The disciplines learned during the IPO process in relation to the lines of communication within the broker remain essential once the company is trading on AIM. The corporate broking team remains inside the Chinese wall and is therefore able to receive inside information in the same way as the Nomad. However, communication from the company to the sales, research and trading departments must be controlled by the corporate broker as these departments must only have access to publicly available information (ie that released via regulatory announcements). Should a salesman or research analyst receive inside information, they will become 'offside' and will be precluded by the broking house from acting on the company's behalf until such information is made public.
Fundamental to ongoing communication with the market will be the research provided by the company's broker. The research analyst will publish notes in reaction to company news (such as results, trading updates and acquisitions) and events within the sector, explaining their implications on the company. The investment case elucidated at flotation has been accepted, but the market will want to track progress and the company's success in meeting and exceeding the milestones set out. This will underpin and indeed drive the market valuation.
Regular news flow allows the analyst to adjust forecasts and recommendations accordingly, which permits both existing and new investors to assess the company and perform their own analysis ahead of making any investment decision. As the company is a public entity, analysts from other brokers may well initiate coverage on the company which is always a welcome development as it is usually in response to increasing investor interest and results in an elevation of the company's profile. Indeed, a recent development is that some companies now pay independent research houses to produce notes on top of those already provided by their own broker.
The broker's sales team circulates the house research notes and ensures continued dialogue with existing investors. It will also have meetings with the company's management team on a regular basis to ensure it keeps up to date with corporate developments.
As the company's story matures and milestones are achieved, the sales team will also market the company to new investors who did not purchase shares at IPO. Once a company has delivered on its expected performance, it is much easier to convince investors that it will do so again on the basis of a demonstrable track record.
Some broking houses also have an investor relations team in the corporate broking department. Roadshows will be arranged after results and the company may be invited to participate in special investor events such as sector conferences. These provide a valuable opportunity for the company to remain directly in contact with its shareholders. Following a roadshow or conference, investor feedback will be provided to the company, summarising the market's thoughts on the company, its progress and the management team. On occasion, this may contain criticism from the investment community, but it is essential that this is accurately communicated back to the company so that issues may be addressed. As this again requires management time, the IR team will work closely with the company to agree a communication plan and ensure that a disciplined approach is taken.
The fundamental reason for a company to join a public market is to create a market for its shares so that they may be freely traded. The trading arm of a broker facilitates this by making a market for the company's shares, essentially acting as the focal point for buyers and sellers to congregate. This function is essential to providing liquidity and determining price.
One of the main benefits of being traded on a public market is continued access to equity capital from both existing and new shareholders. As on admission, there must be a compelling investment case carefully explaining the reason for the new capital requirement and the effect that it will have on the company, such as an earnings enhancing acquisition. Though this section will not seek to summarise technical details, the significance of AIM's regulatory environment is that it provides a flexible environment for a secondary fundraising which can be performed in a number of ways.
If time is of the essence, a fund raise can be limited to an institutional audience as on flotation. Alternatively, the company may wish to include a pre-emptive element to the fundraising, whereby all shareholders are offered the ability to participate, including retail investors. This is typically performed through a rights issue or open offer, which is viewed as a positive decision as shareholders are not diluted by the issue of new shares and therefore not seen to be 'disenfranchised'.
As the previous sections imply, access to further funds from the market will be dependent upon the company's performance since flotation and the track record that it has established by accomplishing that which was promised. This emphasises the importance of establishing a realistic initial investment case on admission to AIM, for whereas supportive shareholders would most likely be willing to provide further funding to a successful management team, disappointed shareholders are unlikely to 'throw good money after bad'.
The role of broker is often seen solely as enabling access to equity capital upon admission to AIM. This chapter hopefully demonstrates that the relationship between the company, broker and market is considerably more complex and long-lasting. When appointing a broking house, a company should seek one with expertise in the relevant industry sector. This can be ascertained by ensuring that the research department covers the sector and that the sales team has a track record of raising finance for similar propositions. Speaking to institutional investors and clients of broking houses should allow a company to distinguish between those that support their clients in the aftermarket and those that are primarily interested in the IPO fee and may offer a reduced level of service following admission. It is vital for a company to consider these factors when selecting a broker.
The ability of a broking house to raise finance upon admission to AIM is a key factor in deciding which firm to appoint, but placing power alone does not lead to a successful existence on the public market. It is important to appoint a broker that understands the business model and believes in the future prospects of the company. This allows the broker to communicate effectively progress to the investment community, thereby ensuring a healthy long-term relationship with the market as well as access to further finance.


