It used to be said that a company should list where it’s based. There is still good logic to this but today the realistic options for a growth company to list are wider than ever. That makes it more of a buyers’ market, giving optionality to boards that allows them to raise capital more cost-efficiently.
As in so many areas of the economy, the pandemic has accelerated change – specifically the internationalisation of the listing market. The technology enabling Boards to communicate with investors remotely is not new, but the wide adoption of that technology is a step-change from the past.
Acceleration in the pace of international listings for growth business
It makes little difference today where in the world a company is listed. Arguably, this is a win-win for all concerned. No longer do management teams have to take as much valuable time out of the diary to meet investors and equally buy-side managers can be more selective about how they use their time.
Non-deal and many deal-focused roadshows can now be done from the comfort of a CEO’s office, allowing them to keep a firm hand on the tiller, satisfying their role as steward of the Company, while enabling investors to meet their fiduciary duties.
At the TSX and TSXV, this is clearly demonstrated by market activity:
Despite lockdowns and hugely reduced travel by executives, bankers, lawyers and dealmakers, the numbers have all gone up. International listings and the number of financings are significantly higher in 2021 - between January and May this year, 18% of the companies listed on TSX and TSXV have come from outside Canada: UK, Israel, Australia, Singapore and the USA. The TSX has always been recognised as an international exchange for growth companies, and during the pandemic, this strength has been clearly demonstrated, with continued interest from growth businesses that would traditionally have listed closer to home.
Commenting, Mike Lauzon, head of technology banking at Canaccord Genuity in Toronto, said: "The pandemic has allowed us to be more efficient and we are able to execute more transactions using technology." Sander Grieve, Corporate Partner at law firm Bennet Jones, in Toronto, added: "As lockdowns began, we embraced all of the remote working tools that have been put in place over many years. We quickly transitioned with the newly mastered tools to run full-blown M&A, RTO, IPO and financing engagements, with a huge boom in the volume of activity. Time spared from aeroplanes was fully deployed pursuing client objectives. "
So, what should boards be considering, when looking at listing options?
Arguably, this depends on the primary reason for listing. The obvious reason of course is to raise funds, to develop the business, pay down debt, rebalance the capital structure or allow existing investors to cash in.
But there are other equally valid reasons to list. For some, it is more about gaining credibility with commercial partners or attracting and retaining key employees. For the family-owned company, it may be about creating a market for the transfer of shares in a tax-efficient manner.
Each of these drivers should lead a board and company to choose a different outcome for the listing. A family company, looking to trade shares within a finite group, should hardly consider a premium list on an international market. The cost would be prohibitive and far outweigh any possible benefits. Equally, an international corporate, seeking growth capital or commercial kudos, would struggle to achieve its aims through a local exchange with limited oversight that is outside the investment remit of the funds it is seeking to attract.
Accessing the right type of investor is also a key consideration and vital to a company’s long-term prosperity. Arguably, investors are the platform on which the future ability of the company to deliver on its business model is based. Without the right type of investor, a board can be put under pressure, starving the business of cash, limiting reinvestment and potentially leading to its long-term decline. This is typical of the juxtaposition of an income fund and a company needing growth capital.
Accessing the right type of investor
Accessing the right type of investor on some exchanges is a function of scale. Unless a company is of a certain size and liquidity it will simply not attract the investors it needs. The cut-off point for institutional investors on AIM is often thought to be around £100mln and on NASDAQ it is somewhat greater still. This poses a real risk to growth companies, particularly those that need the backing of their investors to use the listing, post-IPO.
Another key consideration is cost, both at IPO and in the aftermarket. The cost of listing and being listed varies enormously from one exchange to another. The TSX publishes an indicative cost guide on its website but this is unusual among exchanges.
On IPO, the Board needs to consider the cost to the company versus the rewards an exchange offers. Cost is not just financial but also the opportunity costs of time out of the business. In some markets, that cost falls more heavily on the company, with much of it borne upfront and before investor interest is really known. On others, a more balanced system has been developed, that better weighs up the risk/reward between company and investor. On the TSXV, this comes in the form of a Capital Pool Company (CPC), which is essentially a SPAC for smaller companies.
One advantage of using a CPC is that it gives increased certainty to the listing company. The Board knows that though a CPC, the investment they are making in listing the business will give them the outcome they are looking for, whether that be the capital needed to develop the business or a share register in keeping with the Company and its ambitions. CPCs are very well established in the Toronto markets, having been in use since the 1980s, with over 2600 companies having listed through them to date. In fact, listing via a CPC is the single most widely used way of going public on the TSX Venture Exchange.
Think of costs too
The cost of being listed also varies enormously from one exchange to another. NASDAQ and AIM started as low-cost growth company exchanges but, over time, they have become relatively high costs and burdensome, with significant management time required to manage investors and the listing. That is fine for a large company with an army of IR people but for a small company with a small team, devoting significant time and budget to managing the listing overgrowing the business can have a material impact.
The approach the TSX Venture Exchange has taken to regulation is a pragmatic balance of risk versus reward, and investors on the TSXV understand they cannot have their cake and eat it. They are aware that when they buy into a growth Company, there is greater risk involved but with that comes the potential rewards they are seeking. It is, after all, a Venture Exchange. Growth companies by their very nature are higher risk and the regulatory regime that supports them and their investors needs to take that fully into account.
Conclusion
Boards and growth companies are better placed today to access the right exchange and the right capital to grow their business and deliver on their ambitions and potential. But, with choice, there is a greater need than ever to carefully consider the cost and benefits that different exchanges offer. That decision also needs to be taken in light of the reasons for listing and the requirements of the company post-IPO. It is a long-term decision and there are many factors at play but getting it right is vital to long-term success.
This editorial was provided by TMX Group