Is investment likely to ramp up after Brexit Day? - Jennifer Malcolm

No lack of capital but a ­general hesitation in the market because of national and international events at play– that would be a fair summary activity in the initial public offering (IPO) and merger and acquisition (M&A) space in the latter half of 2019.

Ambitious companies will likely dust off their on-hold growth plans, says Malcolm. Picture: Peter Devlin
Ambitious companies will likely dust off their on-hold growth plans, says Malcolm. Picture: Peter Devlin

Cash was readily available but ongoing concerns about Brexit, and if and when the UK would land on a European exit date, allied to a looming general election, resulted in domestic and international investors holding firm and delaying important ­decisions on where to allocate funds.

With a Conservative government now enjoying a substantial majority and the clock ticking down to 11pm tonight (albeit minus any Big Ben bonging) when we officially leave Europe, it will be interesting to see if 2020 will deliver a meaningful increase in IPO, M&A and other fundraising activity which makes it over the line.

Ambitious companies will likely dust off their on-hold growth plans and acquisition strategies and there is no shortage of potential investors for high quality businesses with strong management teams.

It is not the case that investors will only be attracted to longer-established businesses with healthy year-on-year turnover and earnings growth. Relatively young enterprises, with a good business story, a strong growth trajectory and a talented and ambitious management team, should find favour in the capital markets.

'Significant' IPO raises

A great example is healthcare tech firm Induction Healthcare Group, which Pinsent Masons advised on its £34 million IPO on the Alternative Investment Market (Aim) last May. With a strong and experienced management team, Induction Healthcare was a pre-revenue business which had a strong growth story and was able to raise a significant amount on its Aim debut to fuel growth.

There may be opportunities this year for companies to join Aim at a lower-than-average valuation. The average market valuation of Aim IPOs in 2019 was around £100m, but this has left a gap for fund managers who have venture capital trust (VCT) funds to deploy and an excess of funds which they have not been able to deploy. Typically, VCT funds are available to high growth companies which are newer, often with a lower-than-average valuation, and can be crucial to a successful raise.

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With co-hosts EY, we were delighted to welcome this week a number of Scottish businesses which are interested in exploring whether IPO is the most appropriate option for their growth. It was invaluable to hear from guest speaker ­Gordon McArthur, chief executive of Beeks Financial Cloud Group, on how he and his management team negotiated the path towards a 2017 Aim listing in which the company was valued at £24.5m and raised £7m to support further growth. In ­particular, it was interesting to hear of the benefits an Aim listing has brought to the table for Beeks.

Fellow speaker Neil McDonald, of Cenkos Securities, advised how to be best prepared for an IPO and ensure you are able to meet investors’ expectations.

Mindful that an IPO will not be the right choice for all companies, there is a surplus of private equity (PE) funding available to the right candidates. There can be a lingering misconception, possibly more so in Scotland, that PE investment can lead to a loss of ­control. However, investors are engaged in winning over hearts and minds to the view that PE is often a viable and valuable platform for owner/manager businesses and ­management teams who wish to pursue growth opportunities.

Last year was certainly a low watermark for IPO transactions. However, I am fairly positive that 2020 will be less subdued and we will see one or two Scottish companies following the success of Beeks and Springfield Properties, while others embrace the positives of PE funding. It will be interesting to watch how quickly an uptick in activity can be achieved.

- Jennifer Malcolm, legal director and corporate finance specialist at Pinsent Masons