10 reasons why IPOs are en vogue, and why it might be right for your business

The bounce back from Covid-19 has seen a renewed interest in Initial Public Offerings (IPOs) as a means for accelerating growth plans. The first quarter of this year saw more IPOs in the UK than any other quarter since 2018.

Despite facing a number of headwinds, such as supply chain disruption, labour shortages and inflationary pressures, a number of brands in the retail, consumer and hospitality sectors have been reported as considering an IPO; Burger King UK, Hawksmoor, Puregym to name a few, with the likes of Tortilla, Deliveroo and Dr Martens completing an IPO.

So why would a business in these sectors consider an IPO? Here is our top 10:

1. Depending on a company's objectives and its financial position, an IPO may be preferable to M&A or a private equity sale/investment if the business wants to raise money to achieve certain goals without bringing in other long-term partners.

2. Undertaking an IPO allows a company to bring in expertise from brokers and investment banks, whose contacts with fund managers and institutional investors are often essential for securing opportunities to raise funding a company needs or wants.

3. Investors in London generally have a good understanding of, and appetite for, the food and beverage sector and its associated risks.

4. The depth, quality and sophistication of the UK capital markets continue to compel quality companies to seek London listings and the second half of 2020 into 2021 saw a surge in companies seeking to go public.

5. London offers a two-tier stock market – the Main Market and AIM. The AIM market gives companies access to retail investors and gives investors a clear view of higher-risk but also potentially higher-growth stocks. The Main Market generally distinguishes larger, typically less-risky companies that wish to target primarily institutional investors.

6. London-listed companies are widely respected for having high corporate governance standards and levels of transparency, due to the London Stock Exchange's global standing and the FCA's reputation for thorough regulatory scrutiny.

7. Evidence suggests that public market finance is increasingly favourable towards companies with strong ESG profiles. Being a publicly listed company gives a business a platform to showcase ESG credentials. The London Stock Exchange has also introduced a Green Economy Mark for issuers that meet certain criteria – for more information, see our guide: Qualifying for the LSE's Green Economy Mark.

8. Pursuant to the recommendations of the UK Listing Review (March 2021) the FCA is expected to introduce a number of reforms to the UK Listing Regime by the end of 2021 to make London IPOs (and other routes to becoming a public company) more flexible and streamlined. For more information, see our guide: The UK Listing Review: Relax and float?

9. One of the key recommendations of both the UK Listing Review and the Kalifa Review of UK Fintech (February 2021) is an amendment of the UK Listing Regime to enable companies listed on the premium segment of the London Stock Exchange to adopt dual class share structures (DCSS). This enables company founders to retain more control of their business post-IPO, among other benefits. For more information, see our guide: Dual class share structures: What are they and how do they work?

10. COVID-19 opened the door to virtual roadshows, which are cheaper and less time-consuming than the traditional in-person roadshow normally connected with IPOs, giving companies the option to keep IPO costs down.​

Reflections from a franchise perspective

If a business which is considering an IPO either franchises already, or is thinking about franchising in its growth plans, the following considerations should be front of mind:

• There will be much greater public scrutiny of performance versus any declared targets. If franchisees are ultimately responsible for the performance of some or all of the targets, how are those targets formulated and enforced in the franchise agreements?

• If there is disharmony or change in the network, this needs be handled with even greater care – if the wrong message is sent to the market, there could be an immediate hit on the share price.

• Greater public scrutiny and enhanced reporting obligations means that a floated business may be less "fleet of foot" when compared against privately held competitors.

• On the plus side, a successful IPO will be seen as great long term endorsement of the business, and it might improve the covenant strength of the business. This could be valuable if it is a premises-led business and the franchisor takes an interest in a franchisee's real estate.

Given the rise in multi-unit, multi-brand operators (MUMBOs) in the UK, it is conceivable that a franchisor which is not a public company will be approached by a MUMBO which looking at an IPO. In this circumstance, a franchisor should carefully consider its position in respect of granting any consent.

First, does the franchisor have a right to approve or veto such a request? Usually, the answer is yes. If a franchisor is open to such a request, it should consider developing a set of approval criteria, such as rights of approval over the admission document to guard against the disclosure of confidential information, limitations on the percentage of shares which are subject to the IPO and requirements for certain key individuals or shareholders to remain invested in the franchisee.

Conclusion

Whilst we expect there to be a cooling off in the current interest for IPOs in the short term, it is clear that businesses operating in the consumer facing sectors are increasingly looking at sophisticated ways of attracting new investment.

It is therefore important that businesses start this kind of journey with advisors who know their sector, how the capital markets operate and who understand the unique dynamics of business models such as franchising and distribution.

Fieldfisher is top ranked by the independent legal directory Chambers and Partners both for Capital Markets: AIM and Franchising.

Our equity capital markets team advised on deals valued at approximately £1.2 billion (€1.4 billion) across 74 separate transactions on the London and Paris capital markets in 2020. This included 4 IPOs; 40 secondary issues; and 21 M&A deals.

If you would like more information on this topic, please contact Gordon Drakes or Brad Isaac