| The National

This year has started strongly for the initial public offering (IPO) market, with EY’s Global Trends report naming it the strongest first quarter since 2011.

More than US$44 billion was raised in the first quarter, an 82 per cent increase on last year. Markets are buoyant, stock is high, and there is a strong appetite for new listings. All of which is good news for companies considering an IPO.

But how does a company know when it is right for them? Why do it at all? What are the challenges involved, and how should a company prepare? And, crucially, where should they list?

It used to be the case that moving from private to public ownership was seen as a natural progression for a company, once it had reached a certain size. Clearly the right time will depend, to an extent, on external matters like market conditions, but perhaps the best way to evaluate when it is right for a business is to examine what they are trying to achieve.

One of the main reasons companies go to IPO is to access capital, since listings create liquidity for the founders of a business. But there are other advantages. Going public means an objective value is placed on the business by the market. This is in itself a benefit, and also brings other considerations. For example, it makes it easier for the company to make acquisitions. One of the most commonly offered considerations in mergers and acquisitions is stock, but private companies can find it difficult to issue their illiquid stock as it cannot easily be valued.

Secondly, companies can offer stock to employees as remuneration. This is better for the business as it aligns employee and company interests; staff have a direct personal incentive to maximise shareholder value. It has also proved in the past to be a particularly effective way to retain senior directors. Finally, there is the public relations angle: Going public improves the status of a business with both customers and suppliers and raises the company profile, overall. In addition to being great public relations, this can even potentially reduce the cost of capital.

For companies looking to achieve these things, the next question is whether market sentiment is right. Are stock markets in rude health? Is there a strong appetite among investors for new issues? If so it is time to examine what challenges the company might face in the journey to IPO.

The most important challenge to be faced is ensuring that institutions are comfortable with the company – what it is, what it does, its purpose and business model. They must be reassured that it cannot be easily replicated, and that its business is sustainable. The key is to go back to the original business objectives; what is the company for? If there is a clear understanding of this, then it will be far easier to communicate to potential investors.

The second challenge is to hire good advisers. The right advisers will have a good track record, understand your business, understand your country of domicile, and – crucially – be right on top of all the financial information.

There is one other potential challenge, which is that companies that go public will inevitably attract far greater public scrutiny. But this can be a great benefit as well, as the discipline it offers can be of real, concrete value to a business.

Choosing the right exchange is critical.

As markets and businesses have become increasingly more global the task has become more challenging, but there are also a number of options. The most crucial element is to choose an exchange where your business is most readily understood by the customer base. If investors do not understand what a company does, it is unlikely to be the best place to list. The culture needs to match, as shareholder expectations can vary, and companies should bear in mind that different exchanges place different obligations on companies – such as regulatory frameworks – which can have business implications.

And the companies’ stage of development can have an effect, making a company more suitable for a particular market. For example, a company that wants to enter a new market might choose to list there to get exposure. Finally, the market must be sufficiently large and liquid to suit the size of the business.

Now may well be the best time for companies to consider an IPO since the late 1990s, thanks to the robust health of the markets. What is crucial is that companies do the right preparation, and this will mean facing the challenges above.

David Petrie is the Head of the Institute of Chartered Accountants in England and Wales’ (ICAEW) Corporate Finance Faculty

Bourses are buoyant, stocks are high and more than $44bn was raised in first quarter listings. But proper planning is still needed as companies test the public waters.