Once upon a time, the pathway for high-growth companies was clear: founders would build the business up to a certain scale before taking out some value and raising new capital through a public market listing. But this route is no longer the default option, with increasing numbers of fast-growing companies eschewing the IPO market in favour of private fund-raising activity.
In the UK last year, just seven high-growth businesses floated on a stock exchange, the lowest figure since 2012, according to data just published by the market analyst Beauhurst. By comparison, there were 20 IPOs amongst this cohort in 2018 and 23 in 2017, Beauhurst’s figures reveal.
There have been some high-profile examples of the trend away from flotations. The food-delivery giant Deliveroo, for example, had been expected to IPO last year but instead opted for a $575m equity round. Supercar manufacture McLaren is another case in point – it’s been rumoured to be on the point of unveiling an IPO for much of the last decade but has so far always opted to raise private money instead.
What has changed to make founders and owners think again about IPOs? Well, one simple explanation is that the need to float on a public market has been negated by the wall of money available privately. Private equity funds and venture capital investors are sitting on vast piles of dry powder – the former alone have almost $2.5 trillion at their disposal according to one recent assessment by Preqin. In this environment, any halfway decent privately-owned company has a good chance of raising capital without having to go public. That includes even relatively mature businesses looking for large slugs of funding, with investors now willing and able to write much bigger cheques than in the past.
It’s also the case that business owners recognise an IPO is exceptionally hard work, both during the transaction itself and thereafter. The process of a private fundraising is far more straightforward, much cheaper and less time-consuming than a public listing. And once you’re quoted on a pubic market, the rigours of market regulation, public scrutiny and shareholder relations can prove very onerous. Many business owners find themselves swamped by these new demands on their time and end up taking their eye off the day job.
Another anxiety is that valuations on public markets can be so arbitrary. The price of an IPO depends only partly on investors’ assessment of the business – the prevailing market sentiment is crucial too. During periods of uncertainty, like the current environment, market volatility can lead to IPO disappointment. Sentiment matters in private deals too, of course, but not to the same extent.
This is not to suggest IPOs no longer make sense for any companies – and Beauhurst thinks the UK may see more public listings this year if political volatility eases in the wake of Brexit. Still, with the availability of private funding still so high and the potential pitfalls of an IPO process so front of mind – ask beleagured WeWork about the joys of preparing for a listing, for example – there’s good reason for founders and owners to continue questioning the wisdom of what used to be the conventional journey for a high-growth company.