The future of corporate finance

Is the initial public offering (IPO) market dead? You may think so reading
December’s statistics. While the market for secondary fund raisings in 2009 was
exceptionally busy, especially at the larger end, the IPO market remains firmly
in the doldrums.

A net 15 companies (excluding re-admissions and transfers) joined AIM in 2009
and £740m of new money was raised, significantly down on 2008 and paltry by
comparison with the eye-watering statistics of the three previous years.

The same trend was reflected on the main market where ten companies floated,
raising £353m.

Although there is plenty of chatter about bulging IPO pipelines, primarily at
the larger end of the scale as private equity investors look to realise their
larger investments, how much of this talk will actually translate into completed

In addition, those smaller and medium-sized businesses with flotation
aspirations face continuing uncertainty – 2010 will be a challenging year
globally and the economic outlook for the UK continues to be obscured by the
political fog of an impending election. Against this background, institutional
investors face calls on their cash to support existing investments, with little
or no time being allocated to IPO candidates.

All is not lost

Capital markets haven’t shut for business, but the focus must be on quality
and in ensuring that companies do not come to market ill-advisedly. IPO
candidates must be properly prepared, not just for the IPO process itself but
for continuing life on public markets. In order to attract the attention and the
funds of investors, the emphasis on quality of business proposition and of
management will be stronger than ever. If the silver lining to the current grey
clouds is a stock market populated by good-quality well-managed businesses, then
that will be no bad thing.

This is a good time to consider the introduction route to market for
companies where private or pre-IPO funding is already in place, where a public
fund-raising can be deferred and where there is already a sufficient spread of

This relatively simple admission to a public listing without seeking new
investors allows the company to build up a public profile, produce results and
generate positive attention.

In an environment where funds will continue to be scarce and where
competition for those funds will be intense, a track record as a public company
will put it at a significant advantage when competing for funds at a later date.
Our client China Private Equity took this route following a small fundraising in
Hong Kong (see box). We continue to work with several other potential
introduction candidates.

M&A: ready to go

As for the mergers and acquisitions (M&A) arena, the ingredients are all
in place, in theory at least, for an upturn in activity:

* Valuations have fallen sharply since 2007 – out of AIM’s 1,300
constituents, 825 companies were valued at £25m and below as of December 2009.

* The decline in sterling should enhance opportunities for overseas buyers,
especially euro buyers.

* The stream of secondary fundraisings last year will have strengthened the
balance sheets and appetites of corporate acquirers.

* Financial buyers continue to sit on uninvested funds and remain under
pressure to identify and complete investments.

* Many institutional investors have signaled their wish to exit smaller
investments during 2009 and a greater willingness to consider and accept
management-led buyouts backed by private equity investors.

However, reality will be different – a very significant number of those
smaller public companies will remain unloved, unwanted and potentially stranded
on public markets and the recent trend of delistings will continue. This may not
provide shareholders with an exit, but it will at least save some significant

Owners and shareholders of better quality businesses will simply defer any
decision to sell, so falling valuations will not translate into good businesses
being available at bargain prices. In addition, while private equity providers
will be eager in principle to back management teams, the availability of debt
remains a constraint and we do not expect a rash of all-equity funded deals.

Overall though, there is a renewal of momentum which will translate into more
activity. But this will still be fragile, reflecting the economic and political
uncertainties of the first half of 2010. We expect to see most activity
continuing around sales, turnarounds and restructurings of distressed
businesses, as Jon Moulton clearly does – he launched Better Capital onto AIM at
the end of 2009, precisely to focus on this space.

IPO’s and M&A deals will not disappear in 2010 – but it is time to focus
on quality, to be selective, to be clever and to be persistent.

What is likely to grab investor attention in 2010?

* Larger companies with global operations will be viewed more favourably.

* Exploration/production companies and natural resources businesses will remain
in favour due to their international operations and exposure to global pricing.
Cleantech companies, such as waste recycling and alternative energy, should
continue to attract interest although there may be closer scrutiny of these
business’s shorter term returns.

* Anything consumer facing or reliant on government spend can expect to be
viewed with scepticism in the first half of 2010 at least.

* Improved liquidity, which in our general view means fund raisings of a
least £20m from a wide spread of investors and a minimum market value of not
less than £50m. However, smaller amounts of money can continue to be raised for
good quality companies, priced sensibly and structured in a tax efficient way,
which will appeal to IHT funds and VCTs.

China Private Equity

China Private Equity was admitted to AIM in October 2009 with Shore Capital
acting as Nomad and broker. CPE invests in small-to-medium-sized growth
companies operating principally in Greater China with a particular focus on TMT
and financial services.

CPE considered floating in autumn 2008, but negative sentiment following the
banking crisis towards equities and new issues led the company to postpone its
plans into 2009. AIM requires an investment company at admission to hold a
minimum of £3m in cash. CPE already had an existing investment valued at $18m
(£11m) which, combined with a small Hong Kong fundraising to meet this
requirement, enabled the company to be introduced with a market capitalisation
of $23m (£14m).

CPE would have liked to raise significantly more funds, but the main priority
was achieving a listing on AIM. While overall market sentiment towards
fundraisings for small/mid caps may improve in the medium term, overseas
companies seeking to raise funds in London are likely to come under much greater
scrutiny. A large number of overseas companies and funds came to the market when
investor appetite was at its highest, but subsequent under-performance and
de-listings have soured current appetite.

This is where the value of an introduction comes into play. When fund raising
conditions improve, CPE, as an existing AIM stock with a tangible track record,
will be much better positioned to attract investor interest than new listings –
which always involve a certain amount of risk, particularly when they are based

Michael Cobb and Andrew Raca are directors of the corporate finance
division at Shore Capital.

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