Joining the IPO pipeline – recent lessons for listing in a pandemic

If you’re sitting in your dining room in Melbourne, home schooling your children, working with your team remotely and watching the rest of the country carry on regardless, you may be wondering whether the majority of Australians quite understand that there is a pandemic playing out. 

With the economy struggling, institutional investors with obligations to put other people’s money to work have been somewhat starved of initial public offerings in which to invest.  According to a recent article in the AFR, there have only been 22 initial public offerings in 2020, raising a combined $358 million.

However, if our deal pipeline is anything to go by, this is about to change.  The significant increase in the ASX 200 (up well over 35% since its low in late March) has created exciting conditions for companies looking to go public, and we are seeing first hand an appetite from companies to join the ASX. 

We’re currently working on four separate engagements relating to IPOs that are scheduled to hit the boards in the last quarter of this year or the first in next.  Together, they would more than double the capital raised this year.  Given the apparent appetite for new IPOs, we thought you may be interested in some learnings from our recent experience.

Go fast! Go early!

There’s an old saying in transactions that ‘time kills deals’.  In the current environment, making a call to raise capital on market requires a confidence as to health, economic and financial issues both at a broader market level as well as in respect of your individual business.  Given that a typical IPO timetable is a 12 to 18 week process, if you’re contemplating an IPO and being listed before Christmas, you need to get going now!

It’s not all about new money

As the name suggests, an IPO is generally about a company offering new shares to the public in order to raise capital, typically for future growth.  However, a significant number of IPOs are structured to enable existing shareholders to sell down their current holdings in order to create some liquidity for their prior investment.  If you’re planning this for your shareholders, you may wish to contemplate a ‘SaleCo’ structure (with shareholders selling into a single stand alone entity that will itself, along with the Group’s main holding company, issue a prospectus and sell to the public).  This mechanism can be time and cost effective and most importantly, if structured carefully, potentially provides a method by which existing shareholders can mitigate the risk that they would otherwise have to take for prospectus liability.

It won’t be an immediate full exit

Between the application of the ASX Listing Rules and the need of your brokers and offer managers to ensure a deep and liquid market for the company’s shares, existing major shareholders are unlikely to be able to sell out in full.  A typical escrow deed is likely to be required, restricting major shareholders from selling a proportion of their shares for up to two years.  See this article for more details on recent changes to relief available for escrow arrangements. 

Pre-IPO capital?

Many companies look to take advantage of a future intention to list to attract some private capital before their IPO.  This capital is often ‘unpriced’, with the intention that it will be priced at a discount to the proposed IPO price.  This mechanism typically utilises a convertible note structure.  If you’re proposing such a mechanism, or if you’re investing in a pre-IPO funding round, you will need to carefully consider the Corporations Act “on-sale restrictions” that could apply to shares issued on conversion of the notes. If those shares are issued after the offer under the prospectus has closed, and the offer of those shares was not genuinely made under the prospectus, then those shares may not be eligible for the prospectus exemptions from the “on-sale restrictions”. This can cause problems for the issuer in getting those shares quoted on the ASX and even bigger problems for the pre-IPO investors who may be unable to trade their shares. Careful structuring of offers under the prospectus can address this risk.

If you’re currently contemplating an IPO Gerry Cawson, James Burchnall or Alyce Ricciardi would be happy to talk to you.  Alternatively, if you’d like more information on the listing process you may want to take a look at our simple IPO guide on the ASX website.