The concern in relation to the decreasing number of US IPOs also applies to the UK. The July 2017 position paper by the Quoted Companies Alliance noted that over the last 10 years there has been a 31 per cent fall in the total number of companies listed on the LSE and a 41 per cent decline in the number of AIM companies. The vintage of companies coming to market has also lengthened: the QCA reports that the average age of companies coming to market in 2011 was 11 years, versus 4 years in 1999 – meaning investors could miss out on the years of “explosive” growth.
The reasons identified in relation to the decline of US IPOs are clearly relevant in the UK. Worries about the regulatory burden echo. I would also highlight the additional management bandwith required to run an IPO process as against a fundraising or M&A transaction.
But the “wall of capital” cannot be understated: there is just an absolutely astonishing amount of money ready to be deployed. For example, at the end of 2017 Preqin calculated global PE dry powder as over $1tn. This is combined with more flexibility as to how funds are able to spend it, including longer holding periods and targeting lower risk deals. In relation to private funding rounds at early stage, fast-growing companies, Beahurst has also identified 2017 as the “year of the mega deal” - which are single investments above £50m - and in 2017 more cash has been invested in British high-growth companies than ever before. There is plenty of capital available without having to IPO.
Not only is this wall of capital starving the public markets of IPO candidates, but there is evidence to suggest it is fuelling the demise of listed companies through “take private” transactions too. 2017 is likely to show a growth in “take privates” as against 2016, where 35 per cent of UK public M&A transactions were PE or fund backed. And surely PE funds will increasingly have to look at the public markets for larger targets on which to spend their piles of cash.
So the outlook for IPOs and the public markets is challenging. But all the good reasons to have a vibrant public market in the US apply to the UK too. The strong UK corporate governance regime for listed companies could surely help prevent some of the reported bad behaviour in late stage start-ups. It is also worth remembering that UK pension auto-enrolment is forecast to make millions more people (knowingly or not) investors in the UK public companies, putting even more of an onus on ensuring a decent quality and quantity of IPO candidates.
It is therefore important that the UK public markets continue to be an effective and relevant source of capital for growth companies going forward. There is clearly work to be done!