June 22, 2017
By Daniel Klausner, Managing Director, Capital Markets Advisory Leader, PwC Deals
Our team at PwC has helped numerous clients prepare for an IPO – from pre-kick off with a readiness assessment, through development and filing of the S-1, to pricing the IPO and finally to being a public company; and all the steps in between. One area where I see companies consistently challenged is with their equity story. The equity story is really the foundation of any successful IPO. The purpose of the equity story is to create a vision for the organization while serving as a compelling rationale for why investors should be interested in buying the stock. Investment bankers will rely on it to determine the marketability of the company and, most importantly, the valuation, while lawyers will use it to make sure the disclosure in the S-1 is correct. It’s important. However, it’s often a problem area on the path to being public.
In our experience, even an IPO that’s priced attractively to the buy-side won’t necessarily draw investors who can’t grasp the fundamentals and strategy that underpin the historical and projected financials and valuation. Investors will want to make sure that the business model and its future prospects, the market growth and the company’s ability to monetize its customer base all “hang” together.
In a recent paper, we outline the most significant areas of interest about the company for the investor during the IPO process. It turns out that the fundamentals of the equity story play a primary role in whether an investor buys the IPO:
Investors are looking at the company’s potential to grow and dominate within a promising growth industry. Because an IPO company has less financial information than a public company, it’s more difficult for investors to see trends. It’s vital that the equity story gives investors confidence that management is focused on the right growth verticals/channels in the marketplace to demonstrate the growth trajectory.
The equity story must explain how the company’s competitive advantages will leverage industry growth drivers. The company needs to position itself so that an investor will clearly see that the company is set up and structured to capitalize on those trends driving the market and how it plans to grow after the IPO.
Investors are looking to understand how your business will grow – right now and over time. Specifically, investors want to know how the company will grow – organically and/or through acquisitions. They’ll also want to know how the company plans to use the proceeds.
To become comfortable with an IPO’s valuation, investors want to understand what forward multiples and financial ratios a company plans to present regularly. The buy-side will want to understand how to assess the company against its comparable companies. Forward multiples and KPIs that matter to investors vary depending on industry and market trends, as well as the maturity of the business.
Investors are also likely to look to other metrics to determine growth and profitability such as sales, margins, and customer metrics. Being able to reliably measure and predict some of these key metrics will be a baseline expectation from investors and investment bankers.
The equity story should also demonstrate how a company’s projections, growth and multiples compare with its comps. So, identifying the right comps will be challenging yet critical to achieving the optimal valuation of the company.
Deep talent bench
Investors are clearly more comfortable with seasoned management and directors at the helm as a company goes through the IPO. The equity story should cover management experience including transaction experience and experience through the cycle. The key is to show management credibility and confidence.
We recommend that companies fine-tune and further develop the equity story well in advance of filing their S-1. Making sure that the development of the equity story is not rushed will help maximize the value of the company in the eyes of investors. In addition, how the company positions itself will have a direct impact on the equity value, the dollar offering size and percent of the company sold. Finally, aligning the equity message both internally and externally may provide incremental clarity and vision for employees during the IPO process, produce a common theme for recruiting and retaining top talent and ultimately facilitate a consistent and clearer articulation of the company’s value proposition to investors and/or potential acquirers. Outside advisors like PwC can be a vital asset during the entire IPO process, including the development of the all-important equity story.