IPO activity surges, pre-IPO capital emerges to bridge to next year’s listings

Record Point is an independent corporate advisory firm with operations in Sydney and San Francisco. We specialise in domestic and cross-border advisory services for public and private companies including mergers and acquisitions, capital raisings, corporate partnerships, debt advisory, restructuring, strategic reviews and valuations.

Global IPO market

The onset of COVID-19 created a period of uncertainty in capital markets and amongst investors globally at the beginning of 2020, impacting IPO activity for the first half of the year. Whilst COVID-19 has continued to impact economies worldwide, global investor activity has rebounded strongly with several large IPOs coming to market and an abundance of new issuances in the pipeline as capital remains in excess with yield hard to find.

Australian IPO Market

In recent months, Australia’s IPO market has kicked off a period of strong activity with the country delivering the busiest month for new listings this year in October, up more than 100% over August. On an even more positive note, the pipeline of new listings is likely to drive strong activity through to the end of the year and into 2021.

Despite this, we will still see 2020 being well down on prior years as the impact of the early COVID-19 deferrals and cancellations will not be fully offset by the late surge.

Australian companies are increasingly looking to the public markets for liquidity, where a string of successful floats has built confidence around execution risk. Trading valuations are often outcompeting interest from strategic and private equity acquirors, noting the ASX benchmark is up 40% from COVID-19 lows. These dynamics have created a large opportunity for investors to gain exposure to new listings across a broad range of sectors and sizes. Examples of IPOs exploring an ASX listing include $1 billion+ businesses such as software platform Nuix and Brookfield’s Dalrymple Bay Coal Terminal.

Australian IPO Outlook

The outlook for the Australian IPO market is tied to the prospects of economic recovery and the currently unknown impact of easing stimulus measures across the country. Additionally, the US election and drawn out transition is a key event that may impact global trade conditions and subsequently flow through to investor sentiment, having driven an uptick since Biden was called by the US TV networks.

The recent easing of COVID-19 restrictions in Victoria, along with stated intention to for borders to re-open before Christmas will fuel greater business activity, supporting investor sentiment and confidence.

In recent years we have seen the rise of alternative payment and consumer fintech players that have dominated market headlines with the rapidly scaling platforms demanding large revenue based valuations. More recently, investors are showing signs of reduced appetite to support this growing category with examples such as Laybuy experiencing a strong selloff.

In recent investor discussions we have had consistent feedback that investors are looking beyond the technology centric issues seen recently to more traditional businesses that are likely to do well as the economy moves to a new normal. A series of megatrends linked to COVID-19 are front and centre in sectors such as e-commerce, health and beauty, meal delivery, alcohol, and home improvement.

 Pre-IPO capital

Pre-IPO capital is capital raised by a private company in the lead up to a future planned IPO. Pre-IPO investing is typically undertaken with a limited set of information that is far less onerous to prepare than a prospectus, targeted to a small group of sophisticated investors.

When a company undertakes a pre-IPO raising, there will usually be guidance provided on the likely timing of an IPO, with caveats around the prevailing business and no guarantee when or if the company will undertake an IPO, or what the IPO share price will be. Investors should be aware that there is a higher risk involved with pre-IPO capital raises. To reflect this, pre-IPO capital is usually offered at a discount to the anticipated IPO price. For the company, the placement is a way to raise funds and offset the risk that the IPO will not be as successful as hoped.

Pre-IPO investment opportunities are usually restricted to high net worth individuals, professional investors and investment funds.

Pre-IPO trends and investment characteristics

Australia has seen an uptick of pre-IPO investments in recent years, a trend that is expected to continue. The market has seen companies attempting pre-IPO rounds of funding to prove up their growth model and support capital requirements in the face of COVID-19 capital shortcomings.

Feedback from brokers suggest pre-IPO investors are looking for:

Pre-IPO convertible notes

A common instrument utilised for pre-IPO funding in the Australian market is the issuance of convertible notes, which allow investors to convert their debt to equity at a discount to the IPO price. Several recent Australian IPOs have followed pre-IPO convertible note issues, for example Manuka Resources (ASX:MKR) in July 2020, where the existing notes converted at a 24.1% discount to IPO offer price.

Given the abundance of IPO opportunities currently available, convertible notes are becoming an important investment class to allow investors to join a company’s register early, at a discount and provide a short path to potential return on investment. For the company, raising pre-IPO capital allows them to deliver on the growth of a business, which is critical to support the value underpinning the ultimate IPO.

Investors should be careful to actively diligence the business and the probability of an eventual IPO proceeding, including any pre-IPO restructuring implications. In addition, convertible notes may incorporate a valuation cap, which is a hard cap on the conversion price for noteholders regardless of the price per share on the next round of equity financing.

Recent transactions have seen convertible notes typically priced at 20-25% discount on expected IPO pricing with a coupon accruing 7-10% in the interim period.

If you are considering taking advantage of the current bullish investor sentiment to raise capital in the public or private markets, please feel free to reach out to one of the Record Point team to discuss the alternatives available.

 

 

July 30th, 2020