The journey from pre-IPO to ASX public company
- Thu 06 May 2021
In 1997 Amazon undertook its IPO at a valuation of $300mn. It’s now valued at $1.7tr. Xero listed in 2007 with a $55mn market cap, which is now $20bn. Afterpay listed in 2016 with a $165mn market value which is now worth $35bn. An IPO can be appropriate for many companies at various stages of their evolution. Xero went public with $100k in revenue. Amazon went public when it was losing -$6mn. Afterpay had only 100 merchants on its platform when it went public. All three businesses are now world class in their respective areas of business.
Too often an ASX IPO is considered appropriate if you have years of traction, are well established financially and are valued at $1bn+. There is an alternate (small and cynical) cohort of believers that ascribe to an ASX IPO as the last source of capital for some early stage companies – a view we disagree with. The ASX is in fact a logical avenue for growth stage assets needing capital and allowing those same assets to seamlessly raise capital again in the future. Think of private companies that engage in their Series-C/D, which can often take months to complete. In contrast a listed ASX company can request a trading halt on its stock at 4pm on one day and have successfully raised its capital by the time the stock is ready for trade at 10am the next day.
The reality is an ASX IPO suits all sorts of companies, and at various stages of their evolution. One key motivation is that the founder and CEO wants to retain significant control and not be at the behest of private investors for years ahead. An IPO may be ideal if the business has traction and is in the midst of a aggressive growth phase. The IPO is effectively a funding round for growth capital to scale a new market or extend the product offering. In some ways, we believe that an ASX IPO for many ANZ home grown businesses is mutually exclusive to raising from US VCs. Raise on the ASX, retain your domicile, create job opportunities domestically, but still have the ability to dominate and change behaviour with your product globally!
As an investor in public and private assets, when we see a company go public, we like the following as pre-requisites:
- Demonstrated product-market fit, and now proven/accelerating traction
- Ideally $10mn+ revenue and accelerating growth prospects
- Established management and board
- Founder/CEOs active and majority owners
- Well-known and reputable capital table
- Complete financial statements
- Have completed a pre-IPO within the last 12-24 months
- IPO to extend growth, not provide liquidity or to pay off debts
The first few points above are obvious. I’d like to now shift the focus to points 7 & 8.
What is a pre-IPO, and why is it important?
In many ways it is a “dry-run” before going public. The company prepares its business, financials, management team and seeks to raise some capital that “firms up” the business prior to the public offering on the ASX. Many companies will use it as an opportunity to work with an adviser or investment bank which then becomes their partner for many years for all things capital and investment related. Generally, the monies raised can be utilised for all or any of the following:
- To super-charge growth into the IPO – invest in product and sales
- To pay off debts so that balance sheet becomes more robust
- To provide liquidity to early shareholders so as to mitigate over-hang at the IPO. Effectively “cleaning up” the cap table
- To allow founders to take some cash off the table
- To bring in strategic partners
As stated above, the pre-IPO takes place 12-24 months prior to the IPO. The structure of the transaction is often a convertible note that has an expiry term (to motivate the IPO occurring), has a valuation cap (to allow the investor some flex for future gain), and is often a discount to the final IPO price (commonly 20-30% of the IPO price). Generally speaking, some of the note holders may be locked up (escrowed) post the IPO so as to ensure an orderly exit once the company is listed. Escrow will often depend on the stage of the company, profitability (or loss) of the asset, duration of the holding whilst private, and whether the investor was seen as a promoter of sorts or directly involved in the decision making of the business. Generally, for a pre-IPO investor, the rule of thumb which we observe is 50% of the holding is escrowed for 6 months post listing and the balance on the 1-year anniversary. For founders it is common that escrow of at least 2 years applies. There are exceptions to escrow– where the aggregated profit for the last 3 full financial years is $1mn, or in the case of unprofitable companies, certain revenue, capital raise and valuation figures have been achieved
Once the pre-IPO is complete and the investors are bedded down, the hard work begins! Lawyers, bankers, accountants, advisers, investors, documents. Having been actively involved in several pre-IPOs and IPOs, this process is a non-trivial exercise and generally is a consuming period of work for the next 3-4 months until that bell is rung on the floor of the ASX!
It is critical the company listing have an established SLT (senior leadership team), as all hands-on deck are required. We all know how important finance and the CFO is. I can’t emphasize enough their importance in this process. Often, they are the backbone to a successful transaction. A prospectus is a 200+ page document. Every sentence in that document has to be verified to a source or person. That process alone can take weeks. The audited financials is another process which must have started well in advance of an IPO – like 12 months prior at least!
The mission to undertake an IPO is critical. We often find that many ANZ based businesses seek an IPO because they are fatigued from the private capital raising world – especially the time investment. An IPO gives the asset profile and capital to execute to their ambitious growth plan. In most/all instances the IPO is not for liquidity, especially for technology companies. The ASX IPO capital raise is the enabler to achieve more. In addition, it is rare to undertake an IPO to pay off debts. Hence, the pre-IPO may in fact be for some element of cleaning up the balance sheet or providing some liquidity, but the IPO is the boost for acceleration of the business.
For most technology companies, we generally always see a pre-IPO capital raise. Recent pre-IPO companies that have gone onto successful ASX listings include Airtasker, Splitit, Nitro, Cluey, Aroa, Topshelf, Cashrewards, and Tyro just to name a few.
Some of the players that are dedicated to private-to-public or pre-IPO investors include Regal, Perennial, Ellerston, TDM and Alium Capital. We believe the bench here is increasing with some larger fund managers recognizing the space to be “hot” and they are establishing ventures that tap this opportunity as well. Overall, we believe that many more ANZ technology and innovative companies will consider an IPO, and hence a pre-IPO is a logical journey to pursue. That said, the total dedicated pool of capital in this arena is still only about $1bn, and hence we believe the opportunity set will continue to grow.
It is exciting to see that technology companies (by volume) dominated the IPO space in Australia in 2020. Given the number of pre-IPO opportunities we have already seen in the first four months of 2021, we remain extremely excited about the prospects for the pre-IPO and IPO arena in an ASX context. Where is the next Amazon, Xero and Afterpay?
Please come forward for a pre-IPO.
About the author
