Exits aren’t just IPOs & Roads Shows…
Article written by Mason Doick, Head of Corporate at Scottish fintech InfinitX
A successful exit plan for your business needs to start early and be built with the support of the team you have around you. And given current market dynamics it’s never been more important to invest the necessary time to fully consider the options available. At its core, there has been no real change here – you’re either looking at a trade sale on a whole or partial basis, or otherwise it’s a case of releasing equity in the firm, affording founders and early stage investors in the business the opportunity to continue sharing in what will hopefully be the ongoing profitability.
One fundamental shift that has been observed however is companies staying private for longer. Traditional IPOs aren’t off the table - even if we have seen a real slowdown in deal flow over the last 12 months as monetary policy normalised and macro-economic headwinds have been building – but the burden associated with seeking a full market listing only ever seems to increase. IPOs have always been a challenging and time consuming process, with a slew of hefty costs from various parties also needing to be accounted for. And bear in mind that becoming a public company is just the beginning, with significant ongoing obligations to maintain a listing - and placate investors – also needing to be taken into account. Whilst the longer term benefits of an IPO remain clear, the increasingly complex and costly approach here is by definition necessitating a longer runway – something that has the potential to starve the business of much needed capital to fuel growth.
With the IPO burden growing on an annual basis, against this backdrop we’re noticing a growing number of entities who previously may have looked at a listing deciding that the approach now looks uneconomical and the prospective return on investment is no longer alluring. But what are the alternatives if an IPO is too costly and a trade sale sees founders lose all economic interest in the business they cultivated? That’s where platforms like JP Jenkins are able to offer a third way, enabling cap tables to be reorganised, fresh investment to be made into the business in exchange for equity and then for a valuation – and an ability to buy and sell stock - to be available on an ongoing basis. Issuers from many sectors are already benefitting from these services, including technology-play WeShop and the fintech incubator Quantum Financial. For many, this intermediate step has the potential to create a solid foundation when it comes to making the step to a full public market listing.
It’s difficult to ignore the headlines which all too often seem to be declaring the death of the UK as a capital raising venue. But according to UK Finance, the nation’s capital market remains one of the strongest in the world, with highlights including the fact so £14.7 billion of equity was raised in 2021 for UK companies. And the appetite for investing in privately held companies continues apace too. Using the proxy of the government’s EIS scheme, 2022 saw a record £2.3 billion invested under the program, some 40% up from the 2021 figure.
So the key takeaway here is that whilst underlying market conditions may be looking less than optimal and there’s no shortage of people willing to talk down “UK plc”, the investment market remains vibrant and businesses with solid growth prospects have little to fear when it comes to seeking fresh capital. Financial innovation means that there’s more choice than ever and allowing founders to retain an economic interest is arguably a worthy trade off if it paves the way for a better return in the longer term.