By Dr Ufuk Güçbilmez, Senior Lecturer in Finance, School of Management, University of Bath
In February 2016, Elio Motors was hailed in a Forbes article as the “first equity-crowdfunded company to list its shares on the public markets.” After raising nearly $17 million through a Regulation A+ (or Reg A+) offering, the firm listed shares on the over-the-counter market OTCQX. Fast forward to June 2017: Myomo followed suit to become the first company to list on the New York Stock Exchange through a Reg A+ offering. During the same month Adomani got the honour of being the first Reg A+ initial public offering (IPO) on NASDAQ, ShiftPixy became the second. In August, Chicken Soup for the Soul Entertainment became the fourth Reg A+ issuer to list on a major exchange. More companies, such as Fatburger are planning to take the same route to public markets. So, how is a Reg A+ IPO different than a traditional IPO? Should we expect to see more of them (perhaps at the expense of traditional ones) in the future?
Background
IPO markets are highly sensitive to market conditions. Following stock market run ups, IPO volume rises, and vice versa. In this context, the IPO market in the US has been struggling to reach its past levels of activity, which peaked before the burst of the NASDAQ bubble in 2000. There are a few reasons behind the slump in the US IPO market. Firstly, the Sarbanes-Oxley Act, which was enacted in 2002 in response to major accounting scandals, brought along higher costs of compliance. There were concerns that these higher costs could deter smaller firms from undertaking an IPO as they would find it more difficult to absorb those costs compared to larger issuers. Secondly, the financial crisis of 2007-08 hit stock markets hard and investors lost appetite for risky, small IPO firms.
The regulatory response to these issues was the Jumpstart Our Business Startups (JOBS) Act of 2012. In particular, Title IV of the JOBS Act proposed changes to the Regulation A of the Securities Act in 1936. Regulation A allowed private firms to raise up to $5 million within a year from accredited investors such as institutional investors or wealthy individuals without registering the securities issued. But, it was not popular in practice as the issues were subject to review under state securities laws within each state where the securities were sold.
Title IV, which was finally adopted in March 2015, resolved the issue of state-by-state compliance, raised the funding cap to $50 million, and, most importantly, allowed firms to sell shares to non-accredited investors (i.e., ordinary, retail investors) as well as accredited ones. This was the birth of Regulation A+.
This means that since early 2015, private firms have been able to sell shares to anyone interested through equity crowdfunding platforms. But it was only this summer when Reg A+ issuers started to list shares on major stock exchanges, the Reg A+ IPO started to emerge as an alternative route of going public.
Attractive features
Reg A+ offerings have features that are particularly attractive for small issuers. The process starts when a firm files an offering statement with the Securities and Exchange Commission (SEC). The firm can start selling securities only after the SEC qualifies the application.
Under Reg A+, issuers can submit their filings to the SEC for nonpublic staff review. This has the advantage that potential problems highlighted by the SEC can be resolved by issuers in private before the public filing of the documents.
Another key advantage of Reg A+ is the issuer’s ability to “test the waters”. Unlike in a traditional IPO, firms are allowed to market their issue and gauge investor interest for their shares. This means that firms can cancel (or postpone) the issue if there is little appetite for it. This saves companies time and money. It also protects them from a potential damage to their reputation due to an unsuccessful offering.
Which route to take?
The attractive features of the Reg A+ route to going public make it a viable alternative to the traditional route. But, does it mean that the Reg A+ will dominate the market in future, marking an end to the traditional route? Highly unlikely. There are good reasons to believe that the Reg A+ route will be a complement to the traditional route rather than a substitute.
Firstly, the $50 million cap means that the Reg A+ route is not viable for large issuers. For example, the gross proceeds of the Facebook IPO in 2012 was $16 billion, which is 320 times higher than the largest Reg A+ allowed at the moment.
Secondly, bulge bracket investment banks might shun underwriting Reg A+ IPOs, as it makes sense for them to allocate their resources to larger issues, which are a lot more lucrative. Taking the Facebook IPO as an example again, the underwriting discount paid to investment banks such as Morgan Stanley, JP Morgan, and Goldman Sachs exceeded $176 million. In contrast, based on a 7% gross spread, underwriters would pocket a mere $3.5 million in a $50 million Reg A+ IPO. Such small fees are unlikely to be worth the time and effort of bulge bracket banks. Indeed, all of the four Reg A+ IPOs that took place on NYSE or NASDAQ were underwritten by smaller investment banks. So, if an issuer wishes to hire a top-tier investment bank as the lead underwriter of its IPO, it seems it has to wait until it becomes large enough to undertake a traditional IPO.
Finally, traditional IPOs benefit from the information gathered from institutional investors during a process called bookbuilding. Institutional investors such as mutual funds, insurance companies, etc. are sophisticated investors who conduct their own research when investing in IPOs. The information revealed by them help underwriters set a more accurate offer price. It is unclear to what extent institutional investors contribute to price discovery in Reg A+ IPOs. This makes the Reg A+ route less attractive to issuers who are sensitive about the offer price and who can afford to wait for a traditional IPO.
All in all, the opening of the Reg A+ route to going public has been beneficial for equity markets. It gives small issuers the choice between a mini-IPO early on and a full-fledged IPO at a later date. The long-run performance of Reg A+ IPOs is yet to be seen, however.
About Ufuk Güçbilmez
Ufuk Güçbilmez is a senior lecturer in finance at the University of Bath. Previously he worked as a lecturer in accounting & finance at the University of Edinburgh. He holds a PhD degree in finance from the University of Lancaster. His broad area of research is corporate finance, with a particular interest in initial public offerings.
Contact details:
Email: i.u.gucbilmez@bath.ac.uk
Global IPO activity got off to a brisk start in the first quarter of 2017, led by market gains in Asia-Pacific and the US hosting the first two megadeals of the year. In the first three months of 2017, some 369 IPOs raised $33.7b, a 92% year-over-year increase in the global number of IPOs and a 146% increase in global proceeds. Moreover, Q1 2017 was the most active first quarter by global number of IPOs since Q1 2007 (with 399 IPOs raising $47.5b). These and other findings were published in the EY quarterly report, Global IPO Trends: Q1 2017.
Dr. Martin Steinbach, EY Global and EY EMEIA IPO Leader, says: "This is a promising start to global IPO activity this year. In the face of sustained global economic uncertainty, the first quarter of this year has set the stage for accelerated growth in 2017. Economic fundamentals are improving in the major developed economies. Equity index performance and valuations are trending upward, with several major indices reaching all-time highs. Concurrently, volatility is low, underpinning positive IPO sentiment, which is also supported by the successful US listing of a large technology unicorn."
Asia-Pacific dominates global IPOs
Asia-Pacific, led by Greater China, once again dominated global IPO activity in Q1 2017, accounting for 70% of the global number of IPOs and 48% by global proceeds. Greater China exchanges were the busiest, hosting 182 IPOs, with the Shenzhen and Shanghai exchanges being most active and accounting for 20% (73 IPOs) and 19% (70) of the global number of IPOs respectively. However, activity was spread across the region with a healthy set of listings on public markets in Japan (27), Australia (23), Southeast Asia (14) and South Korea (12). In the short-term, Greater China, and by extension Asia-Pacific, is expected to continue its dominance of the global IPO market as the China Securities Regulatory Commission (CSRC) is anticipated to clear an extensive backlog of listings by increasing the pace of IPO approvals throughout this year.
Ringo Choi, EY Asia-Pacific IPO Leader, says: "IPO activity in Asia-Pacific has been powering ahead due to the region's relative insulation from political uncertainty elsewhere in the world, ample liquidity in emerging markets and strengthening investor sentiment on the back of reduced volatility and steady stock market gains. While IPO activity is likely to increase on Mainland China and selected ASEAN exchanges during the second and third quarters, there may be a slowdown in new listings in other markets. Hence, this region may see a temporary drop in activity, but is expected to rebound in the final quarter of the year."
EMEIA IPO activity affected by geopolitical uncertainty
With growing geopolitical uncertainty, activity in the EMEIA region increased slightly by 8.5% YOY, ranking second behind Asia-Pacific by number of IPOs in Q1 2017, and accounting for 21% and 15% of global number of IPOs and proceeds respectively. Bolsa de Madrid, London Main and AIM, and Bombay Main Market and SME were the three most active markets by proceeds. India and the UK were the most active regional markets with 26 and 12 IPOs respectively, followed by Saudi Arabia, which listed seven deals on its new platform, "Nomu – Parallel Market," an alternative equity market with lighter listing requirements.
Steinbach says: "IPO activity in EMEIA was affected by heightened geopolitical uncertainty ahead of upcoming national elections and the build-up to the UK's declaration of Article 50, formalizing its intentions to exit the European Union. However, investor and business sentiment in EMEIA is rising as we continue to see regional equity indices at all-time highs, a growing IPO pipeline, a solid reporting season to date and strong economic fundamentals throughout the region. The key for companies looking to accelerate their growth this year while uncertainty stabilizes is to preserve optionality with a multitrack strategy approach."
US market returns to form
US IPO activity got off to a strong start in 2017, easily surpassing Q1 2016 levels in terms of both IPO numbers and proceeds. IPO proceeds for Q1 2017 are the highest since Q2 2015 (72 IPOs raising $14.3b). The quarter saw a total of 24 IPOs raising $10.8b, an increase of 1,380% in terms of proceeds and 200% by volume on Q1 2016. During Q1 2017, the US accounted for four of the top ten deals globally. The NYSE led IPO proceeds globally this quarter due its hosting of the only two $1b plus megadeals.
Jackie Kelley, EY Americas IPO Markets Leader, says: "The first quarter of 2017 was one of the strongest for the US IPO market and established a solid runway for more deals for the remainder of the year. This positive performance should attract more tech and unicorns to the public markets and further open the door for other sectors such as retail, energy, and real estate. With the market currently insulated from the political uncertainty, more companies are expected to enter the filing process."
2017 outlook is upbeat, despite mixed signals
The reaction to geopolitical events in the financial markets has been far more positive than many had predicted. Pent-up demand for public offerings suggests global IPOs will continue to rise in 2017, with pipelines full, particularly in Asia-Pacific.
Steinbach concludes: "Overall, global IPO markets had the best start with the highest first quarter by global number of IPOs since 2007. The upswing is buoyed by a strong desire for investors to generate returns and the positive momentum from a strong IPO activity in the fourth quarter 2016. However, ongoing uncertainty continues to define the global conversation, in spite of the market rallies seen in many main market indices after respective US presidential and Brexit votes."
(Source: EY)
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown
2016 was the quietest year for initial public offerings (IPOs) in the UK since 2009. The uncertainty following the result of the EU referendum stalled a number of planned IPOs and the US also saw the number of companies going public falling to 7 year lows. Low interest rates make debt more attractive to companies looking for funding, while market turmoil early in the year, as well as the political uncertainty surrounding Brexit and the US election, played a part.
Retail investors had the disappointment of being denied involvement in a Lloyds share sale, although there is still time and plenty of opportunity to rectify this with the remaining c. £2 billion stake.
Today’s announcement confirms that more shares have been sold to the institutions through the trading plan and the taxpayer is no longer the largest shareholder in Lloyds. The taxpayer stake has now fallen below 6%.
Looking ahead, now that interest rates are rising in the US and stock markets are hitting record highs, 2017 could see issuing shares return as a popular way to raise funds. Here are some potential candidates for IPO:
O2
O2 is currently owned by Telefonica, and rumours that the Spanish giant is considering an IPO of its UK business have been swirling for some time. With more than 25 million customers nationwide, the group is one of the UK’s largest mobile operators, and also owns half of Tesco mobile.
Telefonica had previously tried to sell the business to Three owner CK Hutchison for £10.3bn, but the deal was blocked by EU regulators. If the company achieves that price tag at IPO it would be the largest flotation since mobile rival Orange listed back in 2001.
O2 has a long track record of ownership by private investors and if Telefonica decides to return O2 to public ownership, the company’s strong customer base would provide an excellent starting point for including private investors in the launch. That might have the added bonus of making customers stickier in what is a notoriously fickle industry.
BGL Group
2016 saw GoCompare.com split off from parent esure. 2017 could see rival comparison website CompareTheMarket.com join it on the stock exchange with owner BGL Group rumoured to be considering an IPO in the first half of 2017.
The website, which is BGL’s most high profile business, was launched in 2006, with its signature Meerkats first appearing on TV screens in 2009. However, the group also operates a similar website in France under the “Les Furets” (the Ferrets) brand, runs a life insurance business and offers support services for other insurers.
The other three big UK price comparison websites are already listed, which should mean that investors are familiar with the model and make a float easier. But why would investors be interested in yet another price comparison business? Well, it’s the most popular comparison site in the UK and grew revenues by 16% last year, compared to just 5% at GoCompare . . . Simples!
Sky Betting & Gaming
Private Equity firm CVC bought an 80% stake in Sky’s betting arm back in 2014, and there were rumours that an IPO was on the cards in September of last year. However, while CEO Richard Flint acknowledged that CVC will be looking to exit the business at some point, and an IPO is a possibility, there was no timescale at that time.
21st Century Fox’s bid for Sky has altered the situation somewhat. Sky still holds a 20% stake in the business and it’s unclear whether Fox will choose to retain it following the acquisition. The group has no gambling operations elsewhere, and faces strict gambling laws in the US. That might put an IPO back on the cards.
The group is currently eyeing international expansion into markets where Sky already has operations, targeting the German and Italian markets. The move follows a 51% increase in UK revenues in 2015/16. That was driven by a strong performance in the group’s sports betting operations, which saw revenues rise 64%, while online gaming (including Bingo, Poker and Casino) grew 36%.
Speculation has suggested the group could be valued at £1.5bn, and (although 3 years is a relatively short term investment for a private equity fund) that would represent a healthy return on the £800m valuation CVC put on the group when they originally invested.
Darktrace
Away from consumer brands, cybersecurity start-up Darktrace is one potential debutant to keep an eye out for.
Founded by a combination of GCHQ spooks and Cambridge University academics, the group’s software uses machine learning and advanced probability mathematics to detect potential threats. The ability to act independently, drawing on inspiration from the human immune system, means that it can react to potential threats quickly and identify never-seen-before anomalies without relying on existing rules or assumptions.
Darktrace has so far raised over $90m, and was recently valued at $500m. The group reportedly told investors back in October that its ultimate ambition was to float on the stock market, but has since denied that there are any immediate plans to do so.
Nonetheless, with stock markets buoyant and it’s one we think might yet make an appearance in 2017. We just hope that the group chooses to list in London, rather than following the depressingly well-worn path of British tech stocks heading for NASDAQ.
Other contenders rumoured to be considering IPOs in 2017 include;
- Vue Cinemas, £1.5 bn - Vue has more than 200 cinemas worldwide, of 85 are in the UK and Ireland. Servicing nearly 90m filmgoers a year
- Air Astana, c.$6.5 bn - The Kazakh national carrier is considering an IPO in either London or Hong Kong.
- KazMunaiGas, undisclosed - State owned oil and gas company, considering London and Hong Kong as listing destinations.
- Sadia, $5 bn - Halal meat manufacturer, currently owned by Brazil’s BRF. Considering London and Dubai.
- IMG Worlds, undisclosed - The owner of the world’s largest indoor theme park is said to be considering a listing in London or Dubai.
- Crawford Healthcare, undisclosed - The advanced wound care manufacturer has said it is looking “a little more closely” at an IPO following the successful ConvaTec listing last year.
(Source: Hargreaves Lansdown)
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After a particularly strong close for the US IPO markets in 2014, the first quarter of 2015 took a sharp turn with only 38 deals, which raised a total of $5.62 billion (€5.2 billion), according to EY’s Global IPO 2015 Q1 report.
While the first quarter is traditionally slow, this is a drop of 46.5% in the number of deals and a 53% drop in capital raised from Q1 2014. Historically, the US market led the global IPO markets, but for one of the first quarters, it lands behind Asia-Pacific and EMEIA. However, EY forecasts that, with healthy US economic conditions and a backlog of companies looking to exit, the 2015 IPO market should shape up to be a strong year.
A total of 291 companies made initial public offerings in 2014, which was the best year for IPOs in over a decade. 2015 started at a later and different pace, as the first deal wasn’t even offered until January 16. “Quite simply, the pipeline ran dry in 1Q15,” said Jackie Kelley, EY Global and Americas IPO Leader “Deals that were originally slated for 2015 were pushed out in Q4, 2014, during favorable conditions. This was a response to the October volatility.”
March looked set to be a stronger month for IPOs with at least 15 deals being offered, up from the 10 in February. The most recent filings also saw deals worth $100 million and above (€93 million) entering the pipeline.
The energy and power sector led the way, accounting for approximately 25% of the proceeds, followed by healthcare (21%) and technology (18%).
The largest player on the US exchanges was an MLP offering from Columbia Pipeline Partners LP, which raised $1.24 billion (€1.15 billion). When compared with the larger ticket IPOs in 2014 such as Alibaba, which raised $25 billion (€23.2 billion), or Synchrony Financial, which raised $2.95 billion (€2.7 billion), there was no considerable IPO player this quarter. This is on trend with the average deal size continuing to decline, EY stated.
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EY also highlighted the growing pipeline of PE and VC backed deals. VC-backed offerings represented 42% of all the deals.
“The economic health of the U.S. can’t be denied with unemployment falling to 5.5% this month, a six year low,” said Kelley. “While there is heavy anticipation of how the Federal Reserve will address interest rates in June, strong investor confidence matched with even stronger company earnings has helped the markets remain resilient to volatility.”
Investors expect a buoyant UK IPO market in the next 12 months despite the uncertainty caused by the approaching election, last year's IPO woes and a fall in oil prices, according to the first Investor Sentiment Index from BDO's Capital Markets team.
The global research, which questioned institutional investors investing in UK equities with a combined $10 trillion (€880 billion) under management, found that 76% of respondents expected the numbers of IPOs on the Alternative Investment Market (AIM) to increase or at least remain unchanged. At the same time, 77% expected the same for the number of IPOs on the Main List.
Chris Searle, Capital Markets Partner, said: "Despite all the uncertainty, global investors continue to rank the UK as a key place to do business. This positive sentiment is particularly welcome given the number of floats that failed to make it to the market last year."
A lack of UK bank funding was identified by 71% as the overwhelming reason why companies had to seek a listing in order to raise new funds, with technology companies singled out by 51% as particularly attractive for investors over the next 12 months. This was by far the most cited sector, followed by Consumer Goods (36%), Financials (33%) and Healthcare (30%).
In terms of company size, some 67% selected large companies of over £300 million (€400 million) market cap as the more attractive to investors in 2015.
As at December, 2014 had seen 288 IPOs on US exchanges, amounting to $95.2 billion (€80.8 billion), a 54% increase in capital over 2013, according to the latest EY Global IPO Trends: 2014 Q4 report.
While 2013 saw a revival of IPOs in the US, 2014 was even more exceptional, according to EY. As of December, the number of listings was at its highest point since 2000 and a 27% increase over 2013.
While Q4 saw a pause in the markets after the Alibaba listing, IPO investments still remained strong throughout the end of the year given the lack of alternative investment options and low interest rates. In addition, with stock markets trending higher, IPOs outperformed market indices. Companies that listed on US exchanges in 2014 saw average year-to-date returns of 27.8%, compared to the S&P 500 at 12.2%.
“Concerns this is a 2000-like bubble are overplayed,” said Jackie Kelley, EY Global and Americas IPO Leader. “Companies coming to the public markets are well-led, well-priced and have a good story to tell. Their stocks tend to outperform the market attracting solid investor interest.”
Global IPO activity also gained momentum with 1,206 IPOs, which raised $256.5 billion (€218 billion). “This was the best year for IPOs since 2011,” said Ms. Kelley.
In addition, PE- and VC-backed exits were the most significant driver of US IPO activity. A total of $68.2 billion (€58 billion) was raised via 181 financial-sponsored IPOs and accounted for 72% of US IPOs by value and 63% by number.
The success of the Alibaba listing encouraged more cross-border activity, with the majority coming from Europe (26), China (16) and Israel (12). Cross-border activity still remains strong in the US, which accounts for 52% of cross-border deals globally by number and 80% by capital raised throughout 2014.
“In 2014, the US attracted more cross-border IPOs than any other region and its stock exchanges led the world in terms of deals and capital raised. In addition to strong IPO valuations on foreign listings, the growing familiarity with US accounting regulations, the overall strength of the US markets and the access to capital are likely to encourage more cross-border IPOs on US exchanges in 2015,” said Ms. Kelley. In addition, the US hosted more foreign IPOs in 2014 than any other market, with 67 IPOs raising $40.8 billion (€34.6 billion).
This year looks set to be another strong trading year, according to EY. The firm reported that there is a pipeline of 100 companies ready to list in 2015, of which 60 are expected to go public and raise around $22 billion (€18.6 billion) in Q1 2015.
Private equity-backed initial public offerings remained a popular exit route in 2014, according to data published by the Centre for Management Buy-out Research (CMBOR), sponsored by EY and Equistone Partners Europe Limited. New deal activity by volume was higher than 2013, while value rose for the second successive year.
While 2014 did not see any deals above €5 billion, the €1 billion+ market saw sharp growth with 11 deals closing last year – comfortably surpassing 2013 figures.
The €100 million to €250 million bracket also saw growth to report its highest value and volume levels since 2008, while the €250 million to €500 million segment also reached the highest value since 2008.
“2014 was a particularly strong year for the mid-market, which has seen the highest level of deal activity since before the financial crisis. However, this activity has predominantly been led by the exit market; with a huge amount of dry powder ready for deployment across the mid-market buyout funds, the challenge for 2015 will be investing in the right assets at a fair valuation,” said Christiian Marriott, Investor Relations Partner at Equistone Partners Europe Limited.
Total deal values in 2014 reached €61.3 billion – above 2013’s €58.7 billion figure. Deal numbers were also higher: 613 for 2014 versus 562 in 2013. The UK accounted for €18.6 billion followed by Germany’s €11.2 billion and France’s €7.7 billion.
UK buyout value equalled £14.9 billion in 2014 compared to £15.1 billion in 2013.
Sachin Date, EY’s Private Equity Leader for Europe, Middle East, India and Africa (EMEIA) said: “PE-backed IPOs are at a record high since 1998 with 43 PE-backed IPOs worth €44 billion closing in 2014, as financial sponsors continue to capitalise on strong valuations. 2014 also recorded 188 trade sales in exit value terms (€32.2 billion) – the highest since 2011 – and 170 secondary buyouts. 2014 saw the highest value of refinancings ever recorded and has more than doubled since 2012 to the tune of €51.7 billion.
The exit value of above €101 billion is the highest since 2007 and this is only the third time it has crossed the €100 billion mark.
Going into 2015, the European private equity market is expected to steadily improve in line with progress made in the last two years. The pending deal pipeline is around €20 billion in the first few months of 2015.
Latest data released by BDO shows that transactions in the tech sector have cooled somewhat following the record breaking $25 billion (€21 billion) Alibaba IPO in 2014.
The firm forecast that tech IPOs will drop by 14% for the year-end 2014 compared with figures for year-end 2013, but that the future still looks bright for 2015.
BDO stated that tech companies raised $38.9 billion (€32.8 billion) in 2014, the most since the height of the tech bubble when $43 billion (€36.3 billion) was raised in 2000. However, if the Alibaba deal is stripped out, this leaves only $13.9 billion (€11.7 billion).
Julian Frost, Leader of the BDO’s Global Technology team, commented: “The Alibaba Effect hasn’t been as positive as many hoped in sparking new tech deals. Many factors come into play here but it’s clear there’s been a lag in the wake of the mega-flotation as some firms have either held back their deals or preferred to secure new backing to remain private. We are hopeful for a more positive 2015, but while the overall outlook remains unclear, careful consideration is as important as ever.”
2015 should be a more positive year for IPOs as a whole as a number of companies have been delaying their flotations until 2015 in the face of market volatility, claims BDO.
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BDO also stated that a combination of macroeconomic uncertainty and Alibaba-induced caution meant that there were less tech M&As in 2014. With investors’ eyes on how Alibaba would perform, Chinese venture capital fundraising plummeted to $403 million (€340 million) in Q3, a fraction of the $3.78 billion (€3.18 billion) raised in Q2.
As of mid-December, 1,910 deals had been completed, compared to 2,139 in 2013. Although numbers of deals are down, the value of the M&As hit $2.66 billion (€2.24 billion) for the first three quarters of 2014 – a 60% increase on the same period in 2013.
BDO predicts that tech M&As will have a brighter 2015. Individual subsector hot spots have been prominent in driving M&As in Q4 and will continue to do so in Q1 2015. Chief amongst these in the final quarter of the year was FinTech – the tech payments sector is coming to the fore with Apple launching Apple Pay in November.
PHOTO: Alibaba’s corporate campus at Hangzhou, China
