Categories
IPO Financing | How It Works
Moving from a limited company to a public one is one of the most significant stages of company growth in a business’ life.
It is a very complex project that requires a considerable amount of business stability to undertake, and a core part of that stability is regarding the financial capacity of the business.
The Initial Public Offering (IPO) will raise a substantial amount of capital for the business, both at the time of going public and over the longer term, but it is also a costly process.
This guide explores the process of an IPO and details the expected costs and returns.
Contents
What is an IPO Exactly?
What are the Differences between the LSE and AIM?
What are the Costs Associated with “Going Public”?
Raising the Money for an IPO - IPO Finance
What Capital is Immediately Raised Through an IPO?
The 6 Stages of an IPO
Specialist IPO Financing with Clifton Private Finance
What is an IPO Exactly?
An Initial Public Offering is the process of changing the business from a private to a public company, where shares can be bought and sold on the stock exchange for the first time. In the UK, this is typically done on the London Stock Exchange (LSE) or the Alternative Investment Market (AIM).
There are strict regulations regarding an IPO, for which a detailed prospectus must be presented to the Financial Conduct Authority (FCA) that include key information such as comprehensive financial information, risk assessment, management, and business modelling.
Once an IPO is complete, the business enjoys a considerably stronger position on the world stage, with access to substantial additional capital, improved brand awareness and loyalty, and international respect and recognition.
What are the Differences between the LSE and AIM?
The Alternative Investment Market (AIM) is designed for smaller-but-expanding companies looking to become public but who may not meet the very specific requirements of the main stock exchange.
With lower costs, and fewer compliance and reporting requirements when compared to the LSE, the AIM provides flexible access to public investment with no existing trading record or market capitalisation.
The London Stock Exchange (LSE) offers far greater prestige and access to a much wider range of global investors. With far stricter regulatory requirements, it is the target for larger, established companies who can already show a proven solid financial track record.
Floating on the LSE requires a minimum market capitalisation of £700,000, as well as a three-year trading record. Furthermore, companies must show adherence to the UK Corporate Governance Code - or explain why they do not. The Code promotes accountability and transparency, leading to greater confidence and improved risk management for investors.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
What are the Costs Associated with “Going Public”?
An Initial Public Offering is a costly investment for companies for several reasons and involves months of preparation.
The 9 main costs when undertaking an IPO include:
1. Legal Fees
Complying with regulations and drafting the required documents requires the services of a specialist team of legal advisors.
The size of the business, its infrastructure, as well as industry sector can all play a part in affecting the complexity and subsequent cost of legal fees, which typically range from £100,000 to £500,000.
2. Accountancy Fees
Financial statements must be watertight and review by professional auditors. Costs for accountancy services are usually between £50,000 and £200,000.
3. Additional Consultation
There are many professional service providers who can help ensure a successful IPO, from public relations to those who specialise in IPO readiness. Consultancy service fees will vary based on those used and the complexity of the IPO, but tend to range between £50,000 and £500,000.
4. FCA Fees
The Financial Conduct Authority charges for undertaking regulatory requirements, including approving the prospectus. Comparatively, these fees are relatively low, with a £5,000 standard fee for the prospectus review, though additional fees may apply with multiple redrafts.
5. Exchange Fees
There are fees for listing on both the LSE and the AIM.
For the LSE, this is a base fee of £100,000, plus a percentage of the company’s market capitalisation; for the AIM, the initial admission fee is a flat fee of £50,000. In both cases, there is also an additional annual fee.
6. Underwriting Fees
The most significant cost is that of investment bank underwriting, a fee known as “gross spread” and is a percentage of the total funds raised in the IPO, typically between 3% and 7%.
7. Marketing and Roadshows
Promoting the IPO to potential investors is a crucial stage, and cost, of the offering. Here, costs can be between £100,000 and £500,000.
8. Management Time
One hidden cost of an initial public offering is that of management and administration resources. The IPO is likely to consume the majority of the work time of senior management for many months, which can have a considerable cost to the company.
9. Infrastructure Improvements
The standards that a public company must follow is likely to require an upgrade to current systems and infrastructure. While investing in these improvements is likely to be beneficial in the long run, it represents a potentially substantial outgoing cost at the time of the offering.
Total costs for an IPO can vary wildly, but a medium-sized UK company should expect to need between £1 million and £5 million in funding for the process, while larger companies could find these costs are considerably more substantial.
Raising the Money for an IPO - IPO Finance
Where does the capital for an IPO come from? As with all financing of this size, typically it is obtained from a combination of multiple sources that would include:
- Current existing capital - Existing cash reserves and operating income can be used to cover some of the costs of the IPO.
- External investor capital - Venture capital and private equity often forms part of IPO financing as dilutive funding forms the cornerstone of the process and is not seen as negatively as it may be when funding other expansion projects.
- Mid- to long-term loans - Traditional business finance such as asset-based secured loans or even unsecured business loans are often used to provide the funding necessary.
- Bridging finance - With the IPO itself a clear exit strategy in place to secure the loan, business bridging loans that are specifically structured for the IPO process provide one of the best solutions for short-term financing.
What Capital is Immediately Raised Through an IPO?
The very reason for undertaking an IPO is to provide substantial capital for the business for growth, both immediate and in the future - but how much money does an IPO truly raise, and how does it offset the cost of the venture?
The gross level of capital raised through the IPO is not simply equal to the company valuation - businesses usually do not sell 100% of their shares in an IPO! Instead, a portion of the shares are offered, commonly between 10% and 30%.
Initially, the investment bank underwriters will help set the share price, having considered many factors including the current market, investor interest, and the company’s financial health. This initial share price is unlikely to neatly represent the early valuation estimates.
Market conditions will then come into play, affecting investor demand and ultimately altering the value of shares. Greater demand will lead to higher priced shares and a larger amount of capital raised, while poorer market conditions will lower the value and impact the final return negatively.
Finally, it is important to remember that the capital raised through the offering is a gross figure that must yet be offset by underwriting costs.
Capital Raised Through IPO and UK Taxation
The capital raised from issuing shares in an IPO is not considered taxable income for the company, but is equity capital for business purposes.
However, there may be personal tax implications for shareholders including Capital Gains Tax for those selling shares in the IPO, and Income Tax on any dividends.
The 6 Stages of an IPO
The process of an IPO is as follows:
1. Preparation
- Getting Advice - From a very early stage, it is essential to build relationships with legal advisors, accountants, and investment banks to help see the business through the IPO.
- Internal Audit - A comprehensive internal overview of finance and corporate governance must take place.
- Financial Health Assessment - Detailed financial statements and forecasts should be compiled.
2. Engaging Underwriters
Investment banks operate as the underwriters who price and sell the shares. Underwriter agreements can either be firm commitments, meaning the underwriter buys all shares and resells them; or a ‘best-efforts’ agreement, where the underwriter sells as many shares as possible but does not guarantee a complete sale of all offered shares.
3. Meeting Regulatory Requirements
The prospectus, an essential detailed document that describes the company, its finances, and its future plans, must be written. It is then submitted to the FCA for their approval. This may require multiple drafts and resubmissions.
4. Marketing and Book Building
Presenting the company to potential investors is essential to generate interest and ensure sales once the offering is made. Both company executives and underwriters meet with potential investors during roadshows and investor meetings. Investor interest is analysed and bids are submitted during the book building process.
Based on the interest and investor demand gathered from the roadshow, plus data from the book building, a final IPO price is set.
5. Allocation of Shares
The underwriters will allocate shares to investors. This includes determining how many shares will go to institutional investors (those involved in long-term funds, such as mutual funds or pension), and what portion is for retail investors.
6. Going Public
Finally, shares begin trading on the stock exchange (either LSE or AIM). The company is now a Public Limited Company (PLC).
Specialist IPO Financing with Clifton Private Finance
When you are considering going public, you need the best financial partners available.
At Clifton Private Finance, we have a dedicated specialist team who will work with you to develop a comprehensive funding profile for IPO financing.
With access to the full UK marketplace of banks and alternative funding platforms, we can obtain the specialised IPO bridging loans and asset finance that you need to finance an initial public offering.
Contact Clifton Private Finance today to discuss your corporate funding needs with our IPO funding experts.
