Why North American firms should be looking at a London IPO

An Alabama-based oil and gas company that raised nearly $800m in equity and completed 11 acquisitions with a value of $1.8bn in 3 years. A San Francisco-founded payments technology company that has provided a profitable exit for its market leading VC investors, while also making strategic acquisitions. A New York-based life sciences company which raised $50m and less than two years later successfully dual listed on Nasdaq. Each one of them has successfully raised funds from blue-chip investors during the COVID pandemic.

They have one thing in common. They are all listed on London’s public markets.

For growth-hungry North American CEOs seeking to use the capital markets to build billion-dollar-plus businesses, a London IPO could well be your optimal route.

First, let’s deal with four big and common misperceptions.

The US perception:

You need to be a unicorn to IPO.

The UK reality:

Simply not the case.

On AIM you can IPO at a significantly smaller size compared to the US markets. In recent years, the average market capitalization of an AIM company at IPO has been $120m, compared to nearly $1bn on Nasdaq[1].

And AIM provides rich soil from which smaller companies can grow in scale and value. London can even provide a platform for a US company to raise capital and execute a US listing when it has achieved greater scale. (Just read the growth stories below).

The US perception:

It’s too expensive to become and remain a public company.

The UK reality:

Nobody is saying that the process is cheap but the comparison between London and the US exchanges will get your CFO excited. The costs of executing and maintaining a stock market listing is typically much lower in London. Underwriting fees, for example, will typically be 3-5% in London compared to 6-7% in the US[2].

And the ongoing cost and time of quarterly reporting? London mandates half-yearly reporting, therefore reducing the reporting burden on companies and allowing them to focus on longer-term objectives.

Now let’s also get your General Counsel excited. The litigation risk is lower in London. Take a look at 2019 – in just one year 8.9% of all US exchange listed companies were sued. Securities litigation against UK listed companies is simply far less frequent with just three class actions since 2010[3].

The US perception:

IPO under-pricing has become the norm.

The UK reality:

Lack of certainty about valuation is much less of a factor in the UK. That’s because the UK has superior price discovery mechanisms throughout the IPO process, enabling management teams and their advisers to get feedback from investors from the start and to better understand the likely valuation outcome.  

A big IPO “pop” is not a feature of a London IPO. Since the start of 2017, for IPOs larger than $10m in size, there has not been a single UK IPO which “popped” more than 50% on the first day of trading, by contrast, in the US, there have been 174.

The US perception:

Liquidity and access to capital only lies in the US markets.

The UK reality:

London offers North American growth companies the opportunity to efficiently raise repeat long-term capital from international and UK domestic institutional investors. List in London, and you are accessing capital from across the world.

London has more international companies than any other major exchange. It raised 30% of all the world’s cross-border IPO capital in 2019. It stands head and shoulders as Europe’s largest exchange. In H1 2020, there have been 342 follow-on transactions on London Stock Exchange, raising about $28bn[4]. That represents three times more transactions and three times more in IPO and follow-on proceeds than the next most active European exchange.

This depth and scale of capacity means that companies can finance ambitious growth strategies with long-term, repeat capital raisings. It also means that pre-IPO investors can sell down their stakes both at IPO and in the aftermarket even for growth companies. London-listed US-based companies such as Boku, Polarean Imaging, Diversified Gas & Oil, Renalytix and MaxCyte all raised follow-on capital during the current COVID-19 crisis.

Three growth stories

So there is ample evidence of the high levels of investor and analyst receptivity in London relative to North America towards companies with valuations between $50m to $1bn.

This environment has enabled a number of exceptional North American businesses to scale rapidly.

There are already 76 US companies and 27 Canadian companies listed in London. As at December 2019, the combined market cap of US companies on London stood at over $700bn[5].

AIM: a gateway for North American companies back to the US capital markets

For some North American businesses, London has provided the capital to grow and gain critical mass before achieving a dual listing on a US exchange. There are good recent examples.

Take RenalytixAI, a developer of artificial intelligence (AI) enabled clinical diagnostic solutions for kidney disease headquartered in New York City. From its inception, the strategy was to develop RenalytixAI as an independent company and take it to the public markets. While its business model was focused initially on commercialization with large US healthcare systems, much of the cornerstone financing came from UK institutional investors. Its IPO took place in November 2018 on AIM raising $29m with a market capitalization of $81m.

For RenalytixAI, AIM was an attractive option for numerous reasons. It provided a broad institutional shareholder base and the capacity to raise sufficient capital for its product development, with all the corporate governance and reporting disciplines of the public markets. Unlike the capital structures of VC-backed companies, the shareholding structure was clean and simple. (See the case study here.)

The company was able to return to the market to raise a further $17m in July 2019, bringing in other significant institutional investors and providing plenty of runway to execute without having to be concerned about external political or market factors.

In 2020 RenalytixAI announced its plans for a dual listing on Nasdaq and raised $85.1m in July 2020 and now has a market capitalization exceeding $500m.

Achieving a sell-down for Silicon Valley VC investors and also securing follow-on finance for strategic acquisitions

An IPO for a VC-backed tech firm with a sub-$1bn valuation is a rarity in the US. It’s hard not being a unicorn.

But San Francisco-founded Boku, a world leading independent direct carrier billing network, has shown how a US-based company can go public in London and deliver an exit for its VC investors while also scaling up through acquisitions.

Founded in 2008, it had previously raised $87m in six funding rounds with VCs including Andreessen Horowitz, Benchmark, Index, Khosla and NEA. 

While the management team of Boku saw an IPO as the most effective way of balancing the interests of many stakeholders, the company was not large enough to list on Nasdaq. A London listing provided the way forward and raised the profile and coverage of Boku. (See case study here.)

Its IPO on AIM less than three years ago was unusual by US standards; approximately two-thirds of the $59m deal size was a sell-down by VC investors, enabling partial cash exit at the point of IPO. Another accelerated sell-down occurred ten months later and the VCs have continued to monetize their stakes so that none remain significant shareholders. All this for a company with less than $25m of annual revenue, negative EBITDA and a market capitalization below $175m at the time of IPO. 

Boku has also been able to issue new shares to fund two strategic acquisitions, the latest of which was in June 2020.

Raising capital for an acquisition-led growth strategy

Since its IPO, Alabama-based Diversified Oil & Gas (DGOC) has executed 11 acquisitions for a total value of $1.8bn and five follow-on primary equity capital transactions raising a total of around $785m. In 2020, the company has stepped up from AIM onto London’s Main Market. Its market capitalization has soared from $86m at IPO to just over $1bn.

Why did this conventional natural gas and crude oil producer in the US Appalachian basin list in London? For one, its focus on conventional oil and gas was out of favor with US investors, whose gaze was fixed on shale. Besides, DGOC was sub-scale for the US markets. In London, though, the company has been able to tap into high-quality institutional pools of money to enable it to grow at scale and pace. (See the case study here.)

Conclusion

Many North American founders, management teams and VC investors have preconceptions about what makes an IPO feasible, particularly when it comes to the size of the business. The successful IPOs in London of North American companies shatter these preconceptions. In London, you don’t have to be a unicorn to IPO. There is deep liquidity in London and access to high-quality institutional capital at an earlier and smaller size range than in the US – and usually at a lower cost. A London listing can be the springboard for your growth ambitions and, as these success stories show, that’s no misconception.

 

Chris Mayo

Head of Americas – Primary Markets,

London Stock Exchange

 

[1] Source: Factset

[2] Source: Dealogic

[4] Source: Dealogic

[5] Source: Factset

Meet the team

Chris Mayo

Head of Primary Markets - Americas, London Stock Exchange plc

                                                                                                                     

Wendy Huang

Americas Business Development Manager

                                                                                                                                       

Robert Barnes

Global Head of Primary Markets and CEO Turquoise, London Stock Exchange Group

 

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