Whilst IPO markets are adjusting to erratic conditions, companies can use this period to prime their business to be IPO-ready when the window re-opens. 

“We have seen two years’ worth of digital transformation in two months.  From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security…There is both immediate surge demand, and systemic, structural changes…that will define the way we live and work going forward.” Satya Nadella, CEO Microsoft on the impact of the COVID-19 pandemic – April 2020

Two years of seismic transformation, when measured across a behemoth like Microsoft, invariably evidences even greater acceleration of structural change and digital disruption across specific elements of their diverse operations.  Whilst the pandemic has wrought a major human and economic cost, its impact on technology adoption curves has been both pronounced and highly instructive. Some businesses have experienced a dramatic acceleration of demand, evidenced by growth in that same two month period being multiples of that achieved in entire previous twelve month periods.

Positioning for IPO

Given the prevailing market volatility and temporary cessation of IPO activity in 1HCY20, businesses that were on the pathway to public markets will likely have had to revisit their IPO intentions and listing schedules. 

However, the current environment also provides an opportunity for companies to ensure they are in an optimal position for an IPO when market conditions and investor sentiment improve.  As well as identifying new strengths and weaknesses within existing business models, and a deeper understanding of their businesses in times of crisis, the advancement of key IPO workstreams will ensure they are not only best positioned when initially fronting investors, but also will reduce the burden and shorten the time-to-market once the formal IPO process commences.  

Such elements include (but are not limited to):

• Updating and adapting the equity story: given the scale of disruption of COVID-19, the business’ performance over this period will be a critical area of focus for investors, both operationally and financially.  This should highlight management’s capabilities in architecting and executing the company’s crisis response, and serve to re-emphasise any desirable company attributes which were apparent, such as the mission critical resilience or non-discretionary nature of the company’s product or service.  
  
  
• Financial profile: even the most rigorous company financial model will require a thorough reassessment of the inputs and assumptions given the altered economic conditions and outlook.  Evaluate whether the company’s previous short-term (i.e. 6-18 months) and longer-term (i.e. 5 year) forecasts are still prudent, whilst also considering funding availability.  Also consider the re-prioritisation of investment opportunities as the relative attractiveness may have changed. 
  
  
• Board and management composition: did the recent events expose any skillset deficiencies across the Board or management that should be addressed prior to IPO?  Were potential non-executive director candidates or advisory board members available, engaged and effective, if and when called upon for advice and support?  
  
  
• Investor engagement: be proactive in updating existing and other potential investors with whom you have already met and engaged on your path to IPO.  It is prudent to keep them abreast of business developments, and provides another opportunity both to further their understanding of your business and to demonstrate your propensity to proactively and effectively engage with the institutional investor universe – an essential attribute once listed. 
  
  
• Prospectus requirements and structuring: address any long lead items, including the auditing of historic financials, commissioning of any third-party reports, preparation of tax advice and any required corporate restructuring. 

Bridging the financials

Where a company’s financial metrics have been materially impaired by the pandemic, consideration will naturally be given by the Board and management to the extended deferral of an IPO. 

Conversely, in circumstances where the negative impact has been less severe or there are greater strategic and/or business imperatives to proceed with an IPO, the intent with investors will be to moderate the valuation effect of COVID-19 impacted financials, and to avoid investors capitalising a (temporary) earnings impact on the IPO valuation. 

Critical to this will be educating investors on the nature and quantum of the financial impact to the business and assisting them in building a credible bridge to normalised earnings, so they can make a well informed assessment of the business’ prospects, future earnings potential and cash flow profile, thus deriving an appropriate valuation.   

Alternatives to IPO

Given the recapitalisation that has occurred amongst listed companies, it’s unavoidable that there is further necessary balance sheet repair to occur in the private markets and in companies en route to an ASX listing.  Accordingly, even for those companies with the best laid plans and intentions to IPO, an interim path that considers additional private funding prior to listing may be a sound alternative. 

Whilst closing pre-IPO raises in periods of macroeconomic uncertainty and elevated market volatility is more difficult, given investors typically discount the risk associated with a return to more conducive IPO market conditions or mark-to-market against potentially lower comparable listed multiples, a pre-IPO funding round can be an effective precursor to the IPO and worthy of consideration. 

The most important factors to consider when pursuing a pre-IPO round are:

• if using a typical pre-IPO convertible note, do not excessively focus on the IPO discount. Rather, pay considerable attention to ensuring the terms upon maturity are sufficiently flexible in the event that for whatever reason (market, economic or company specific) the IPO does not proceed as envisaged prior to the note maturing; 
  
  
• be mindful of activity and comparable companies in the listed markets and appropriately pragmatic about IPO valuation expectations; and
  
  
• prepare early and populate your target investor pool with a sufficient number of attractive investors such that you do not find your company in a distressed situation, and you can move forward confidently to IPO with aligned investment partners. 

Conclusion

Whilst the recent volatility in financial markets has curtailed near-term IPO activity, over this same period existing ASX listed entities have demonstrated the effectiveness and attractiveness of the public markets in quickly and efficiently raising capital to address funding requirements. 

For those companies with IPO intentions that have necessarily been deferred, there are important preparatory steps which can be advanced ahead of supportive IPO conditions returning. This will ensure that the company is optimally positioned in terms of its investment proposition and positioning with investors and provide the company with the greatest likelihood of a highly successful transition to an ASX-listed entity.