As Superdry exits the London Stock Exchange to “implement its turnaround plan away from the heightened exposure of public markets”, Vineta Bajaj explores why companies are shunning the stock exchange and instead opting to go private.
Since the very first IPO in 1602 when the Dutch East India Company offered equity shares of its business to the public, the concept of “going public” has carried a certain prestige within the business world. Becoming a publicly traded company or PLC implies a high level of financial success and stability, especially if the stock trades within a major market like the London or New York Stock Exchange or NASDAQ.
Like any major business decision, there are pros and cons, and the decision to go public is no different. The term initial public offering has been a buzzword across every major financial district globally for decades. Once seen as the pinnacle of business success, it implied an achieved high level of growth, robustness and financial security which qualified the company to metaphorically “float”.
There are a number of factors to take into account before a company can qualify for an IPO. Private valuations, proven profitability potential, market conditions and level of industry competition. Underwriters require companies to be powerful leaders within their market with appealing equity the public actually wants to buy.
The biggest advantage to becoming a PLC in the UK or publicly traded company in the US is the increased access to capital. A successful IPO piques the interest of hedge funds, private investors and professional traders. Selling stock raises money which the company can use to reinvest and expand to a level which would likely be out of reach for a private company.
Increased investment and capital also allows scope for acquisitions and brings with it a certain eminence on the world business stage, It ensures a broad shareholder base with a multi-faceted outward-looking approach and helps long term inventors realise a return on their investments.
The decline in IPOs
However, IPOs in general over the last decade have been erratic at best with a marked downward trend since the 2021 boom. There were just 23 UK IPOs in 2023, compared to 74 in 2022. By April 2024, there had been just six.
In the UK, the number of companies listed on the London Stock Exchange has declined dramatically. Between 1966 and the end of 2022 there had been a 75% drop in the number of UK listed businesses.
This is echoed globally. Germany has lost more than 40% of its public companies since 2007 and the US has seen a 40% drop since 1996.
Historically IPOs were seen as the primary method for businesses to raise capital through public investments. However, according to Schroders, the amounts raised in UK main market listings over the last five years and more have seen a marked downward trend.
There were 23 UK IPOs in 2023, compared to 74 in 2022.
Public companies are struggling to raise funding due to decreased investment in the UK as the cost-of-living crisis affects cash flow for individual investors.
It also adds pressure to businesses trying to maximise stock performance to mute shareholder grumbles and manage their internal costs in the public domain.
Recent research has shown that the cost and time required to maintain a PLC or publicly funded company has substantially increased. The average UK annual financial report has increased in length by 46% over the last five years. For FTSE 100 companies, the report now stands at 147,000 words and 236 pages, according to Schroders.
Once a business goes public, there are marked differences in pressure and expectation compared to a private company.
As a public entity, there are requirements by the stock exchange on which you are listed for high levels of public disclosure as well as considerably higher levels of regulatory, administrative, financial reporting, and corporate governance regulations to which public companies must comply. These activities can shift management’s focus away from operating and growing a company in a manner unmirrored by the private arena.
The benefits
One of the biggest selling points for going public is access to capital for financing growth and acquisitions; however private companies do have access to other capital streams.
Private equity, whether through venture capital, angel investors or private equity houses, has grown from a $500-$600bn industry in the early 2000s to a $7.2trn industry by the end of 2022.
Companies now have the opportunity to raise tens of billions of dollars whilst retaining their private status. And because many private equity firms focus their investments within an area of expertise, they usually understand the interplay between industry, competitors, customers, tech, and processes and how to maximise growth under these conditions.
There are a lot of well known companies who have gone private in recent year: Heinz, Burger King, Barnes & Noble and Dell Computers
THG founder Matt Moulding says his IPO was a “mistake” and that life as a listed company “has just sucked from start to finish”.
Julian Dunkerton, the founder of Superdry, which exited the stock exchange this week and has begun selling shares on JP Jenkins – a share dealing platform for unlisted or unquoted companies, says it will be a lot easier to turnaround his business in the private arena and the move will bring “significant cost savings”.
Meanwhile, a major Dr Martens investor has pushed for it to go private as it said being an “independent publicly traded company is likely no longer in the best interests of shareholders”.
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So what does “going private” mean?
Moving from public to private is not a decision to be taken lightly but there are a number of benefits to doing so.
Operating as a private business drastically reduces public scrutiny and the intrusive transparency demanded from a PLC.
Private companies can reduce and control their external disclosure as well as keep their financial information and strategic plans confidential from key competitors. Management retain more control over business decisions and strategic direction without having to answer to public shareholders or worry about share price.
Private firms are also not subject to the same regulatory requirements, compliance, levels of governance and reporting standards as public companies, allowing for more proactive decision-making.
Business decisions can be made more quickly and efficiently with owners in the driving seat and without the need for shareholder approval or board consent.
Going private also removes the pressure of detailed annual financial reports as mandated by the stock exchange and FCA which frees up time and cost for management to focus on long-term strategies and growth.
With fewer regulatory requirements, private companies can have more resources to devote to critical research and development, capital expenditures, and the funding of pensions.
However there are some drawbacks to consider when moving from public to private, potential impact on reputation aside. Companies usually go public to raise capital through selling shares.
This gives them a vast stage from which to amass funds. Private companies often rely on private equity, which may be more erratic and more competitive. Private investors are often also heavily involved with the running of the business due to the high personal stakes they have. They are often involved with key strategic decisions alongside management and claim very vocal seats on the board of directors.
There is also a substantial level of financial risk with more concentrated ownership especially if the company has amassed considerable debt during the privatisation process.
High levels of debt in a privatised company can make it hard for the company to fund capital expenditure, expansion or research and development. They are also less protected against the whims of the economy and competitor activity and may struggle to raise additional capital if needed.
Despite the undeniable considerations “going private” raises, it is, on the whole, an attractive and viable solution for many public companies, as long as debt levels are manageable and the company has a reliable cash flow.
Going private can also open doors for significant financial gain, while fewer regulatory and reporting requirements can release time and money to management to focus on long-term strategic direction.
Vineta Bajaj is CFO of pan-Europe online grocery firm Rohlik Group, and held various finance director roles at Ocado
