Corporate finance – Taking the plunge

The past few years have seen more and more bankers, brokers and venture capitalists moving into the corporate finance departments of accountancy firms. The reason? Corporate finance work is a growth area for accountants, not least because the regulators have allowed them into fields in which, up until five years ago, they were not permitted to operate.

A prime example is working on flotations. The due diligence role of the reporting accountant is long established. But accountancy firms are now also allowed to act as sponsors for Stock Exchange listings, and ‘nominated advisers’ for companies on the Alternative Investment Market.

The change means that the big firms, and many of the middle-tier players, now have another string to their bow.

But new roles also open up the possibility of conflicts of interest. Opinions differ as to just how many hats the accountant should wear.

Expansion in corporate finance is not just confined to the Big Five. Group A and other mid-tier firms are reporting increases in fee income via their corporate finance activities – so reasons for developing a strategic expertise in this area are plentiful.

When a client is contemplating a listing, one of the first questions is, or should be: ‘Do you really want to do it?’ Floating on a recognised exchange is an expensive business and, just as importantly, will bring about changes in a company’s culture and management style.

The move should match the objectives of the current owners and managers.

Listing is not the answer, for example, if owners want to realise the value of their company quickly and walk away from it in the next couple of years.

Listing involves not only a great deal of preparation, but ongoing responsibilities to comply with the rules of the exchange once the flotation is complete.

Steven Neal, a corporate finance partner with Kingston Smith, warns: ‘It involves a massive change to company culture just at the time when management needs to be concentrating on new products or services. An AIM listing will take up two or three months of executive time.’

Gerry Beaney, partner with Grant Thornton and head of the firm’s AIM team, argues that a company’s readiness to float depends on more than whether it meets the relevant exchange’s minimum criteria. ‘Investors will look for a demonstrable track record of trading growth, even if that is not required in the rules.’

Also, according to Beaney, the company’s product or service must be credible and have potential, and the expertise and integrity of management must be perceived to be sound.

One important question is how much the company is looking to raise. While a broker’s commission will depend on the volume of the flotation, many of the fees involved in a listing are fixed, so below a certain point the costs become prohibitive. Neal says: ‘Unless you are raising #5m or more, it is hard to be attractive to the (Stock Exchange) official list, and you should really be looking at #1m or more for an AIM listing’.

A Stock Exchange listing can help to raise the corporate profile, and it can attract those institutional investors which will not invest in shares outside the official list. To apply for a listing, a company must appoint a sponsor approved by the Stock Exchange. This could be a member firm (of the Stock Exchange), a bank, a broker or, for the last five years, a firm of accountants or solicitors.

The sponsor’s role is to advise the company as well as vet its suitability for a listing. As well as a sponsor, the company will need a nominated broker (which could be the same outfit). The third key adviser is the reporting accountant, appointed by the sponsor to provide additional assurance. The reporting accountant will file a ‘long-form’ report on the company to the sponsor, and a less detailed ‘short-form’ report which can be included in the prospectus. Fees for these advisers, plus a small army of lawyers, public relations consultants, share registrars et alia, add up to a significant cost (see below).

For most companies, the alternative route to a listing is through AIM. Created as a successor to the Unlisted Securities Market, AIM was intended to be a low-cost option. Also, because AIM does not require a trading record, in theory it should welcome start-ups. In practice, things have worked out slightly differently, although AIM has certainly been successful, with more than 260 companies now listed. Investors have turned out to be more risk-averse than the Stock Exchange had hoped, and few AIM-listed companies are start-ups.

Mark Speller, a plc advisory partner with PricewaterhouseCoopers’ corporate finance arm, explains: ‘The differences between the official list and AIM are not very significant, as far as our perception of a company’s suitability for listing is concerned. If a company is good enough for AIM, it is good enough for the official list.’

Also, says Speller, professional fees are not a great deal less than those for a listing on the main market. ‘The rigours of due diligence require a lot of time spent by lawyers, accountants, nominated advisers and brokers, which all adds to the cost of a listing.’

‘Taking Aim’, a study carried out by Kidsons Impey into attitudes to AIM, found many companies had an unrealistic idea of how much a listing would cost. As many as one-third of those companies in the study believed it would cost #50,000 or less to raise #2m on AIM. In fact, the average cost would be closer to #250,000.

The nominated advisers, or nomads, are the AIM equivalent of sponsors.

In fact, they have more to do in some ways since the Stock Exchange itself regulates AIM with a lighter touch, leaving the nomad with more responsibility.

Accountancy firms can apply to be recognised by the Stock Exchange as nomads, but many have not done so. There are two reasons for this. First, the criteria are tough. Kingston Smith, for example, could probably show sufficient combined experience in its corporate finance department and Cheviot, the firm’s broking arm, but the Stock Exchange does not allow the two to be considered as one entity.

The second reason is some accountants say there is a conflict of interest in acting both as reporting accountant and nomad. Graham Spooner, corporate finance head at Kidsons Impey, says: ‘Our view is Kidsons should not be a nominated adviser. At the end of the day – who is your client, the company or the Stock Exchange?’

How perceivable is conflict?

That is not a universal view, though. PwC’s Mark Speller stresses: ‘I have never understood that perceived conflict. We have a corporate finance team and a separate team of reporting accountants, with different skills and responsibilities. Because it is in everyone’s interest – and particularly the sponsor’s – to ensure that the due diligence is as thorough as possible, we are happy when clients wish to use a PwC reporting accountant team.

It would never be in our interest to ignore important issues.’

Speller also points out that when a company’s broker and nomad are the same firm, there is at least as much potential for conflict, especially over the question of pricing the issue.

Firms such as Grant Thornton and Smith & Williamson are happy to fill the nomad role. According to a survey of AIM-listed companies by Pannell Kerr Forster, however, 64% saw ‘disadvantages’ in having one firm as reporting accountant and nomad, while only 21% saw problems with a broker/nomad combination.

UK firms are much less active in advising on listing in overseas markets, of which the US leader is NASDAQ (see panel, page 12). NASDAQ and the European markets which are trying to emulate its success – EASDAQ and Euro.NM – represent a comparatively expensive way to raise funds. But for companies with a good, preferably hi-tech, story to tell investors, they can be a significant source of capital.

Do some firms run the risk of losing audit clients through their lack of corporate finance expertise? A firm heading for a listing is more likely to drop a small firm in favour of a better-known name, whether Big Five or Group A, but that is not inevitable, says Spooner.

‘Some accountancy firms will introduce us to their clients for flotation work on the basis that we won’t poach them. If we are the reporting accountants, we don’t insist that we are appointed as auditors. That way, we get more referrals.’

Similarly, Speller argues, there is nothing inevitable about PwC’s audit partners recommending the firm’s corporate finance arm. ‘They will not necessarily recommend the firm, but if the client likes the PwC style, it may well use us.’

It seems unlikely that the accountants will one day supplant the brokers and banks, even if they are now competing in some areas, but flotation work remains an important element of the firms’ corporate finance package.


London Stock Exchange main market (‘Official List’)

The UK’s mainstream market for trading in equities. More than 500 overseas companies are also listed here.

Conditions for listing Candidates must have a sponsor and they must have been trading for three years. There is a voluminous rule book.

How much will a listing cost, approximately? The Stock Exchange estimates this should be between 4% and 8% of funds raised, although the percentage would be higher for an issue less than, say #10m.

Suitable for… Larger companies, especially those with market capitalisation over #25m.

Which companies are listed? Most well known UK companies.

Alternative Investment Market

Low-cost alternative to London Stock Exchange, with over 260 companies listed.

Conditions for listing Companies need a nominated adviser, broker and reporting accountant. They must produce a prospectus, but not necessarily a trading record.

How much will a listing cost, approximately? Somewhere between #200,000 and #400,000, plus around 3% of funds raised.

Suitable for… Companies looking to raise between #1m and #50m.

Which companies are listed? Wine merchant Majestic, lingerie group La Senza and football clubs Charlton Athletic, Chelsea, Celtic and West Bromwich Albion.

OFEX Not a market as such, but a ‘dealing facility’ operated by one firm of brokers in London, JP Jenkins.

Conditions for listing Strictly speaking, this is not a listing, but companies must comply with the OFEX rule book.

How much will a listing cost, approximately? About #125,000

Suitable for… Raising up to #2m or so of equity capital.

Which companies are listed? Weetabix, Arsenal Football Club and Aberdeen Steak Houses.


Established in 1971, this is the US’ fastest-growing market.

Conditions for listing Thresholds for net assets of $6m (#3.7m) and turnover of $1m (#0.62m). Companies must comply with US GAAP and governance.

How much will a listing cost, approximately? At least as much as the London Stock Exchange.

Suitable for… Ambitious companies with good prospects for growth, especially hi-tech.

Which companies are listed? Air Canada, Reuters and an up-and-coming IT outfit by the name of Microsoft, to name but three.


Europe’s multinational stock market aimed at high-growth companies.

Conditions for listing Must have assets of at least ecu 3.5m (#2.36m) and reserves of at least ecu 2m (#1.35), plus market capitalisation ecu 50m or more. Accounts must be reconciled to IAS or US GAAP. Companies must have a sponsor.

How much will a listing cost, approximately? At least as much as the London Stock Exchange.

Suitable for… Hi-tech companies with good growth prospects.

Which companies are listed? Innogenetics, 4Front Technologies and Esprit Telecom may not be household names, but they illustrate the predominance of hi-tech companies on EASDAQ.


Not a market itself but a network of European markets for ‘innovative high-growth companies’. Euro.NM links the Paris Nouveau Marche, the Nieuwe Markt in Amsterdam, the Brussels Bourse and the Frankfurt Neuer Markt, with the aim of working towards a pan-European market.

Conditions for listing Varies depending on the individual market.

How much will a listing cost, approximately? Again, it varies, but not less than a London listing.

Suitable for… Hi-tech companies with good growth prospects.

Which companies are listed? Not many – the component markets of Euro.NM were only founded last year or, in the case of Paris, the year before. Cellular phone company MobilCom and German automotive engineering manufacturer Bertrandt are among the largest listed.

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