European Union: New Year Signals A New Wave Of IPOs On AIM

Last Updated: November 8 2013
Article by Mehboob R. Dossa

Equity capital markets have been uncertain over the last few years. Very few companies have been willing to take a chance on raising finance on either the senior or junior equity markets without some kind of compelling external imperative. The typical life cycle of markets during a recession and recovery period has been broken and companies and their investors have felt vulnerable and unable to predict likely outcomes. The result has been a jumpy market with participants playing "chicken" to see who will make the first major move.

There is a sense that this may be beginning to change. Improved economic indicators are giving the markets a flush of confidence. The FTSE All-Share Index has hit a recent series of highs and is 16.09% up on last year (as of 10 Sept 2013). The announcement that Foxtons (the high street estate agency) and Royal Mail intend to float on the London Stock Exchange, indicates that companies and their advisers, are more confident that they will achieve a respectable price and that liquidity is increasing.

Such news and the improving economic outlook are also buoying the UK's junior market: AIM (Alternative Investment Market). Recent AIM IPO (Initial Public Offering) data indicates an improvement in market sentiments. The second quarter of 2013 witnessed a substantial improvement for Asian based AIM constituents. A total of £473.3m was raised on the AIM market in the month of July 2013 and a total of 15 companies joined AIM. This was the highest total raise on London's junior market since June 2011, being 243% more than that raised last July, and a 111% increase on June 2013's total raise. £1.96bn has been raised on AIM year to date, an increase of 23% on the same period in 2012.

Liquidity is being improved by a change in the rules on 5 August 2013 that permits ISA holders to invest in AIM shares for the first time. Following the change, stockbroker, Hargreaves Lansdown, reported a 51% rise in share purchases in AIM listed companies compared with the previous month, and in August, 14% of all money put into shares was invested on AIM, compared with 9.7% in the previous two months – a rise of 44%.

AIM could very soon reclaim its position as a highly liquid and accessible market for capital and start to attract companies from other markets that are unable to raise capital in their home markets.

A reinvigorated junior market will be of crucial importance to the continued growth of UK and international companies. As the economy continues to improve, companies will need to fund growth. To meet demand and take advantage of opportunities they will need capital. The flow of cash from banks to SMEs remains poor. A Federation of Small Businesses survey of 2000 companies published on 9 September found that almost half of those that had applied for a loan in the past three months had been rejected.

With banks not a reliable option, an IPO may be an attractive option, now that the signs are pointing towards increased market liquidity.

Those looking to take early advantage of AIM's improved fortunes should start work now.

It takes a good six to eight months for a company to prepare for an IPO.

The key stages in an IPO process are: identifying and engaging key advisers; undertaking legal and financial due diligence on the group and its business affairs and preparing legal, regulatory and marketing documentation. Some businesses will also need to consider restructuring their group and share capital prior to an IPO to cater for regulatory and tax issues. Such restructuring may require detailed planning and shareholder approvals. The timetable will be dictated by the outcome of due diligence, clarity on proposed structure of the business and share capital and regulatory requirements.

When embarking on an IPO, management will need to allocate time and management and financial resources to engage credible and experienced advisers. Failing to manage day to day business affairs and the demands of an IPO project properly can jeopardise the IPO and have a detrimental effect on the business.

One of the first steps management should consider is appointing an internal team consisting of senior executives and other key personnel to manage the IPO process and identify areas which will take significant management resources. This should then be complemented by an experienced external advisory team. The advisory team will consist of a nominated adviser/sponsor, brokers/investment banks, reporting accountants, legal advisers (for each relevant jurisdiction) and a PR agency.

The due diligence stage will involve intensive work requiring the management to locate and provide extensive information to advisers, and may result in modification work where documents are found to be incomplete. Management should not underestimate the quantity and detail of documentation required. The due diligence process will also involve the nominated adviser/sponsor and reporting accountants visiting the relevant business sites and interviewing key management.

While the due diligence process is in progress, the relevant advisers with the assistance of the management will commence drafting the key IPO documentation, including a prospectus/ admission document, investor presentations, placing agreement, working capital report and long form and short form financial reports. Prospectuses in the UK and the EU require regulatory approval, and time and resources will need to be allocated for the approval process. As part of the IPO process, investors will expect management to put in place appropriate corporate governance and share capital structures, which will inspire the confidence and trust required by all shareholders. The success of any IPO is dependent on the company's ability to raise the required funds. Marketing the IPO will involve meeting prospective investors during marketing roadshows, which can be highly demanding of management time. The successful completion of an IPO is not the end of the process as life post IPO will present its own challenges.

This article is a brief version of the original article that was first published in Finance Monthly, September 2013.

To view the European Business Law Update, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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