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BGF explains: initial public offerings (IPOs)

Our ‘BGF explains’ series is aimed at demystifying the world of business funding by laying out the meaning of key financial terms. We aim to cover everything you might want to know, whether or not it’s a service we offer at BGF. Learn more about our offering here.

 

Also known as floating or ‘going public’, an initial public offering means selling shares to multiple investors in public markets. An IPO can be a powerful way to raise large amounts of capital and may also boost the profile and awareness of the business.

Big IPOs of companies such as Airbnb or Facebook make headline news, but there are dozens more each year on smaller stock exchanges such as AIM (formerly known as the Alternative Investment Market). Large listed companies are known as large caps (short for large capitalisation) and smaller ones known as small caps.

As a form of equity funding, an IPO can raise money from institutional investors and individual members of the public. However, floating brings a number of regulatory requirements and reporting burdens on a business, which vary in strictness depending on the stock exchange. Listed companies are required regularly to disclose their financial performance, for example.

The process can be daunting, but is a significant milestone for any business. It represents the end of private fundraising and suits well-run organisations with an experienced management team. This all comes at a cost, with the IPO process potentially costing up to 8% of the target capital.

What is an Initial Public Offering (IPO)?

As a form of equity funding, an initial public offering (IPO) means raising capital from institutional investors and the public. It describes the first sale of shares on a stock exchange, whether that is a main market such as the London Stock Exchange (LSE), or an alternative market such as AIM.

The IPO process

The process of floating a company can take anywhere from a matter of months to years. The first step involves appointing advisers, such as lawyers and accountants, to help guide the business through the rules and admission requirements of the market where it is hoping to list. To drum up interest in the IPO, the management team of the business will typically engage in a series of marketing efforts aimed at attracting the interest of prospective investors.

Which businesses are best suited to an IPO?

IPOs can be a great option for established businesses with a great track record. They can help attract a wide, diverse pool of investors to support a company’s growth. An IPO typically raises the most capital of any single investment round.

The ideal business profile

  • Established.
  • Continued, steady growth.
  • Appropriately constituted board.
  • An experienced management team.
  • Financial profile to support the valuation of the business.
  • Scalability and opportunity for investors.
  • Prepared for the change in focus and culture that comes with going public.

What they can be used for:

  1. Business funding
  2. Exit
  3. Growth
  4. International expansion
  5. Scale-ups and management incentives
  6. Increasing recognition and strengthening profile

What are the benefits of an IPO?

  • Broad shareholder profile
  • Access to capital for growth
  • Objective market value on the business
  • Makes share schemes more attractive (reward packages)
  • Heightens public profile
  • Increases share liquidity
  • Can enhance status with customers and suppliers

Established companies that are seeking to raise large amounts of capital will typically look to the public markets to provide that funding. Some of the biggest, most renowned companies have chosen to raise capital through the public markets.

BGF and IPOs

BGF is one of the largest long-term capital investors in small cap quoted companies. We typically aim to invest in quoted business that are established and profitable. Since 2014, BGF has invested more than £340 million in more than 80 quoted companies.

BGF also invests in private companies – in fact, the majority of the more than 400 businesses we have backed since we were set up in 2011 were private. Here, BGF can play a crucial role in helping companies prepare for a potential IPO, where appropriate, for instance by bringing professionalisation and rigour to a company’s board. Learn more about what we do.

 

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances. 

BGF Insights 03.24.2021
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As the largest growth investor in the UK and Ireland, BGF has invested in about 400 small and medium-sized businesses, deploying a total of around £2.5 billion of investment. Our teams are spread across the UK and Ireland in a network of regional offices.

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