IPO in the United States? Remember, size matters!
Is your company large enough to IPO in the United States (U.S.)?
You know that when choosing a listing location three things should be considered
(1) the actual out-of-pocket costs for establishing and maintaining the listing;
(2) the effects of a listing location on your company’s valuation and liquidity; and
(3) the non-financial costs and benefits that are available in a particular listing location.
Given that an IPO will often be the most important capital markets and wealth creation event in your corporate life-cycle these considerations should be evaluated very carefully. Unmatched access to capital at a lower cost is a clear benefit of an IPO, along with corporate branding opportunities and a host of other benefits. However, these benefits become insignificant when the analysis that underpins your choice of listing jurisdiction is flawed.
IPOs in the U.S. typically cost significantly more than in other jurisdictions. Legal and accounting fees, printing, brokerage charges to raise the capital, insurances, director fees and other related expenses will be substantially higher in the U.S. than in many other countries. Therefore, it is highly advisable to ensure that a full cost analysis of an IPO listing, in a particular jurisdiction, is completed and then compared with other locations. Our analysis would suggest that the costs and burdens of a U.S. IPO substantially exceed those of other countries.
Have you appreciated the full costs and benefits, including the intangibles, of a U.S. IPO listing as compared with other listing jurisdictions?
The New York Stock Exchange (NYSE) and NASDAQ are the most prestigious stock markets in the world and therefore represent obvious listing targets. However, the competitiveness of the U.S. public markets has been seriously challenged in recent years * in particular:
- the valuation of U.S. IPOs has increased by more than six times – this significantly increases the valuation threshold you need to reach for the U.S. to be an IPO capital raising option;
- the age of companies at the time of a U.S. IPO has increased from approximately six-point-five to ten-point-five years – this reflects the length of time companies require to reach an increasingly higher IPO valuation threshold; and
- the annual number of U.S. IPOs has decreased from approximately 400 to 100 – this is a good indicator of the impact of the rising valuation threshold.
*Source: Dealogic Capital Markets/Capmktsreg.org
So, the U.S. market represents an increasingly shrinking opportunity for the smaller company seeking to IPO. Do you have a valuation greater than U.S one billion dollars? You don’t, then what are your alternatives?
Private equity is the next obvious choice however this is not necessarily the best alternative by which to grow a private company. Private equity funds tend to place lower valuations on their investee companies than the IPO marketplace. They also often impose shorter exit horizons. Moreover, because private equity investors can have different objectives from the founders of investee companies, there is a real possibility of founders losing control of their company. Were you aware that raising capital from the private equity market comes with some significant downside consequences?
Is raising capital from private equity markets really an attractive option for your company?
Because the presence of a strong IPO market permits founders and other entrepreneurs to retain control of a public company post an IPO, and to grow the company with less dilutive public equity, an IPO is still your most attractive route to investment capital. Unfortunately, this choice is increasingly unavailable to smaller companies.
Why is this the case? Underwriters are increasingly uninterested in comparatively smaller capital raises because:
- many large institutional investors will not consider investments in companies having small post-IPO market valuations;
- it becomes much more difficult to obtain coverage of the stock by securities analysts when post-IPO market valuations are projected to be low. As a result, there is a very real risk that these stocks will be deemed so-called orphan stocks (i.e. not followed by any securities analysts); and
- smaller private companies planning an IPO typically have a higher risk threshold than larger companies in a similar position. Accordingly, smaller private companies are more frequently rejected by the largest most prestigious accounting firms for U.S. IPOs.
Therefore, if you are a U.S. private company considering an IPO, with a value of less than US$1 billion you are very likely to be considered to be too small to list successfully in the USA these days. Furthermore, the costs of funding such an IPO listing are simply uneconomic in the USA.
What are your alternatives?
With no easily accessible IPO market in the United States for smaller companies those U.S. private companies wishing to obtain growth capital are forced to seek private equity financing with all of its associated potential pitfalls.
There are however alternatives for US companies, who have a valuation of less than U.S. one billion dollars, wishing to go public, and are prepared to consider jurisdictions outside of the USA. These locations secure the benefits of an IPO capital raising strategy, importantly, with significantly lower costs. The two most promising jurisdictions are the self-contained regions of Europe and Asia-Pacific. In particular, within the high growth Asia-Pacific region, Australia represents an extremely popular choice.
Have you considered these alternative listing jurisdictions? What does your listing cost analysis of alternative listing jurisdictions tell you? Have you discussed your listing options with expert sources who can provide you with a balanced picture of the alternatives available to you? A well-developed business case building exercise should quickly identify that your company size does matter. Moreover, it matters more in some regions of the capital raising world than in others. Your size therefore will be a major influence in determining your IPO strategy including listing location.
About BlueMount Capital
BlueMount Capital specialises in bringing US companies to the ASX, and has an office in Los Angeles to service its American clients
For further information please contact;
Level 32 200 George St
Sydney 2000 Australia
Telephone +61 2 8277 4112
Director and USA representative
1055 W 7th, 33rd Floor, Penthouse
Los Angeles CA 90017 USA
Telephone +1 212 470 6997