Return of the IPO

"Private equity groups are looking to sell stakes primarily to pay down debt."

It could read almost like the opening credits of a Star Wars movie – "A long time ago in a galaxy far, far away… there existed a mechanism for companies to raise capital by selling shares to investors and obtaining a public quotation of such shares on a stock exchange. If this was the first time that a company had raised money in this fashion, the mechanism was termed an initial public offering or, abbreviated, an IPO."

From the second half of 2007 to the end of 2009, the pages of the financial press were devoted to stories of companies struggling to make ends meet, record numbers of insolvencies and companies delisting from the UK's stock exchanges to conserve what little cash reserves they had left. IPOs were few and far between and it seemed certain that they would become a thing of the past for the foreseeable future. However, the start of 2010 has shown that we either have incredibly short memories or that we can expect recoveries to come around a lot quicker these days.

The year started off in spectacularly optimistic fashion, with a flurry of billion pound fundraisings being announced. However, the optimism appeared short-lived and naïve at best. The most notable headline catching IPO to be announced was that of Travelport, owner and operator of the world's largest travel agent booking system, which was looking to raise well in excess of £1 billion. However, the company, owned by private equity behemoth Blackstone, pulled its IPO due to a lack of support from London fund managers. For lack of support, read fund managers unwilling to support the company's valuation.

The Travelport IPO was initially pitched as a sign of things to come – a return to the feeding frenzy enjoyed by investment banks and their professional advisers. Since the announcement of Travelport's intended market debut, other companies joined the fray in quick succession and announced their intention to proceed with blockbuster IPOs.

This included New Look (the high street fashion chain) and Merlin Entertainments (owner and operator of Chessington World of Adventures and Legoland, amongst others). However, just as quick as these companies were on the heels of Travelport to announce their intention to float, they followed in rapid succession in announcing that they would not be proceeding.

Whilst showing us that caution is still the name of the game, it is worth noting that the companies referred to above have a common denominator: they are all owned by private equity groups, who are looking to sell stakes in portfolio companies which, in most instances, they bought at a fraction of the valuation they are now attributing to these businesses.

Another common denominator that may be impacting the flotation of private-equity backed companies is the concern at their debt levels. When the companies were acquired, the private equity groups saddled them with debt, given how attractive borrowing rates were at the time. Fund managers are no doubt questioning why they should back these companies now, when it is clear that the private equity groups are looking to sell stakes primarily to pay down debt (which was partly incurred to pay themselves handsome dividends).

Whilst early February was precipitated with the gloomy news of pulled IPOs, the mid to latter stages of the month were buoyed with the news that a number of large IPOs remained in the offing. The stable of debt-laden, private equity backed companies has been replaced by those with little or no debt, including Ocado (Waitrose's online delivery service) and SuperGroup (the owner of fashion label Superdry). Ocado remains committed to a £1.2 billion flotation despite questions being raised over its valuation. SuperGroup, with no debt and wanting to raise funds to roll out its brand internationally, believes it can justify its £400 million valuation; if proved correct, it would be propelled straight into the FTSE 250 on listing.

More recently, we have seen an international flavouring added to the mix with Canada's Barrick Gold, the world's largest gold miner, announcing it will list its Tanzanian mining assets as African Black Gold with a pricing set to take place within the next fortnight (at the time of writing). Its market capitalisation could potentially reach £2.4 billion, which would see it sail straight into the FTSE 100.

The IPO activity has been felt at the smaller end of the market too.

The AIM market has seen a significant uptick, which is a welcome indicator of potential investor confidence flowing down through the ranks of the public market spectrum.

January saw three admissions occur, all by way of re-admission to the market. Whilst not necessarily good indicators in themselves of the availability of capital for smaller companies, they provide plenty of optimism. Better cause for celebration occurred in early February, with completion of the IPOs of Oxford Nutrascience (raising £1.1 million) and Kea Petroleum (raising £6 million).

Whilst the sums raised by these companies were relatively small, they again provide plenty of scope for newfound optimism.

This article first appeared on the Director of Finance website on 23 March 2010.