Rosalie Chadwick, partner and head of corporate finance at Pinsent Masons takes the temperature of Scotland’s IPO climate
Glasgow-based fashion retailer Quiz recently confirmed it is considering a £200 million flotation on the London Stock Exchange (LSE) and if it goes public will become the first sizable IPO Scotland has seen for some time.
Originally a kilt-making company formed by Mohammed Ramzan, Quiz is owned and run by his son Tarak and family, and could lead the way for a number of other Scottish owned companies coming to the market in the next 18 months.
FreeAgent, the Edinburgh online accounting company, was the last Scottish IPO and raised £10.7m in its November flotation, achieving an admirably strong £34.1m valuation, no doubt assisted by being eligible for Venture Capital Trust (VCT) funds as part of its fundraising on IPO.
With tax advantages for investors but strict criteria on how the funds can be used, VCTs are nonetheless an attractive prospect for early-stage high-growth enterprises. Currently, there is something of a dearth of companies that VCTs can invest in, however there are a number of young Scottish businesses, particularly in the healthcare, biosciences and tech space, which are VCT qualifying and would be well-suited to consider this category of fundraising.
It is also noticeable that more PE backed companies are looking to the LSE as a means to generate funds which will spur further growth, or in some cases, once on the market will seek to provide its PE backers with further opportunities to realise their investment. One example that springs to mind is Inflexion Private Equity, which two years ago floated travel company On The Beach (£240m) and in March generated £33m when it reduced its stake to 11.8% before raising a further £42m last month (May) when it sold a second tranche of 11.8m shares.
Another trend emerging is the resurgence of resources (mining, oil and gas services) companies coming back on to the markets – welcome after a near five-year hiatus – and as we head in to the business end of Q3/4 I expect this to intensify. Indeed, already this year we have had five resources companies come to the market, the most significant of which was ADES International Holdings which raised £188m on AIM to scale-up operations in Egypt, Saudi Arabia and Algeria and to enter new markets in the Gulf Cooperation Council countries.
Notwithstanding the oil price cooling off in the last few weeks, there is once again a genuine appetite in the markets for resources companies which can be attributed to several factors. Increased confidence resulting from more stable commodity prices resulting in a spike in M&A activity; a number of traditional O&G investors have recently come out of positions and are looking to redeploy those funds; secondary offerings dating back 18-24 months have enjoyed strong performances since issue. The net result is increased interest and buoyancy in the resources sector, not only from specialist fund managers but also generalist funds, who on reviewing portfolios have recognised that they are under-weight in resources stocks and are now looking to strengthen their positions.
The smaller oil and gas companies traditionally view the capital markets as their prime source of financing (particularly AIM) which can sit alongside any debt component. Over the last four or five years the equity market has not been open to them but it is evident that dynamic is now changing. General market sentiment is that oil and gas is becoming more attractive and businesses seeking funds to underpin growth are increasingly eschewing debt and private equity in favour of the capital markets.
In the first half of this year 37 companies opted for IPO on the LSE, (25 on the Main Market, 12 AIM) raising just over £3.4bn. More than 61% of those IPOs have traded up in price with the best performer (financial services) enjoying a 121% upswing, followed by a health care business (65.2%), while the strongest resources company was mining concern Rainbow Rare Earths, which has seen a 31.3% increase on its initial offering.
The second half of 2017 is all set for an increase in IPOs and financings in the oil and gas space and other strong performing sectors such as health care, biosciences and tech, and in a Scottish context we could witness levels of activity not seen on the LSE for the last five years.