Should you risk an IPO board?

With competing tensions at play and director reputations on the line, going to an initial public offer is one of the riskiest times in a company’s life cycle.

Tim Fung’s morning jog around Centennial Park in Sydney’s Eastern Suburbs on the morning of 23 March was particularly fast, his best time of 2021, in fact. “I was so full of pent-up energy,” he recalls.

Airtasker, the jobs marketplace he had founded nine years earlier, was to debut on the Australian Securities Exchange that morning. “I have an incredible amount of confidence in what we’re doing over that long-term trajectory, in Airtasker’s long-term value proposition and our mission to empower people to realise the full value of their skills,” says Fung. “But of course, it’s a bit of a moment of judgement. You’d have to be a robot not to be nervous before you get judged by everyone in Australia, basically.”

As it happened, the float was a success, with the shares ending the day up 60 per cent over the 65c listing price. Six months later, the shares are still above $1. “It was a great relief when you could see the pre-trading happening on the screen,” he recalls. “I was like, oh, my gosh, that’s so good we’re not 50 per cent down.”

While Fung is confident in the long-term prospects of Airtasker, there’s a lot more to a successful IPO than having a quality business. His “overnight success” was more than a share price spike on listing. It came on the back of detailed planning and discipline. Most important, says Airtasker chair James Spenceley, is hitting the prospectus targets. “If you do that, then the market has a lot of trust in you,” he says.

Conversely, it can take years to win back the market’s trust and confidence for a company that misses its prospectus targets. They can lose the support of investors and so their ability to raise money in the future. “There’s a huge amount of work that goes into that prospectus targets and it’s your first opportunity to show the public markets that you’re not trying to just squeeze value — you actually understand your business,” says Spenceley, who has been involved in several successful IPOs, including that of the communications company he founded, Vocus.

Ahead of the prospectus preparation, it’s the job of the chair to manage any tension between shareholders who want to use the IPO to sell down their stakes and want the most aggressive possible forecasts and IPO pricing, and those shareholders who want to remain with the business.

The Airtasker board of five — including Xiaofan Bai, managing partner of Morning Crest Capital, and Ellen Comerford MAICD, on the boards of Heartland Group, Auscred and Hollard Holdings — started working on the financial models three months before the forecasts were made. Meetings were initially every fortnight, then every week, then twice a week as they worked with the financial team. They meticulously went through every assumption in the models — how many customers, average task price, completion rate, and revenue.

“A lot of companies try to maximise valuation, but you’ve got to leave a little room for hiccups along the way, Spenceley says of prospectus forecasts.

Prospectus forecast

As it happened, Airtasker didn’t need any extra room. After it listed, the company upgraded its prospectus forecast on the back of better than expected performance and then beat those forecasts when it released its results on 19 August, recording a 38 per cent revenue growth.

Working on the IPO consumed about 70 per cent of Fung’s time and energy in the month before, but the company had put together a team of senior leaders to ensure the company could keep operating while his focus was elsewhere. It meant only Fung and the finance and legal teams were drawn into IPO preparation.

Mike Tilley, chair of recently listed Latitude Financial, questions the value of prospectus forecasts. He says investors should be left to make their own assumptions about a company’s prospects based on the information about a business and its prior earnings. Including forecasts creates a tension between exiting shareholders — who want the most aggressive possible forecasts to maximise the IPO price — and the management team and those ongoing — who sometimes want prospectus forecasts they can easily beat.

“Where you’ve got a really strong selling shareholder and relatively compliant management, you end up with forecasts that are too high,” says Tilley. “And where you’ve got a really strong management team and independent directors, you often end up with forecasts that are too low. They’re never fair.”

In producing the prospectus, management needs to have a clear idea of the company’s unique selling position as an investment, says Tilley. Is it a growth stock? Is it a dividend stock? Founders and owners can have an overly optimistic view of markets’ interest in their company, which is only natural, as they tend to be positive on its prospects. They need to be aware that each investment manager has their own theory about what constitutes a good company — it might be discounted cashflows, growth opportunities or dividends.

“The pitfall is that you misunderstand the investment thesis or criteria of the market that you’re trying to sell shares to, and you either don’t get enough demand or the price you think your company’s worth is way out of whack with what the market expects,” says Tilley.

Booktopia chair Chris Beare FAICD agrees, saying managers need to change the story they tell in a roadshow and explain their company as an investment proposition — and might need coaching from directors who have experience in IPOs.

Booktopia successfully floated in December 2020. It wasn’t the online book retailer’s first attempt to list. It started on an IPO in 2016, but abandoned its plans due to lack of interest from fund managers, who were concerned about the imminent arrival of US ecommerce giant Amazon and the fact that other ecommerce companies in Australia were not doing so well. What it did mean was that Booktopia’s management and advisers had already had a dry run at an IPO and last year’s listing could be completed in just four months, compared with the usual six or so.

Ahead of the IPO, they brought institutional investors onto the register with a small fundraising round, which had two advantages. First, it gave the company a chance to hone its story with a pitch to real investors rather than practising with advisers or consultants. Secondly, the presence of institutions on the share register gave confidence to other investors, who reasoned, “Well, these guys like it and they’ve done their homework.”

Director’s role

Directors need to be heavily involved in making sure the due diligence process for the prospectus is going well and liaise closely with management and advisers who are taking the company to market. But importantly, they’re not running the IPO itself — that is up to management and advisers. “Directors are making sure the process is going smoothly and any issues that look like arising get solved quickly,” says Beare.

It’s equally important that the IPO not be left entirely in the hands of advisers, who are transaction-focused and whose involvement with the company ends once the company is listed. Directors need to manage and juggle the mix of interests in an IPO.

Companies often bring experienced and well- regarded directors onto their board in the lead-up to a public listing, because investors want to see a public board and because overseeing a listed company brings many more compliance and disclosure obligations than a private company.

Fiona Pak-Poy FAICD, a company director who has been involved in seven IPOs, joined the Booktopia board in September 2020 in the lead-up to the IPO. But in joining a board, a director is risking their reputation when they take part in an IPO that turns out to be unsuccessful. Pak-Poy emphasises they need to conduct extensive due diligence before they make that decision.

A private company’s results might not be public, but if the company really wants a director they should be prepared to sign a non-disclosure agreement and open the books. Additionally, potential directors should meet with the chair and triangulate their references. “Do you think they’re a chair you want to work with? Because that’s so critical,” says Pak-Poy. “They absolutely direct the tone of the board and they’re for the company.”

She adds that directors should also seek to be a formal member of the due diligence committee and attend meetings as the prospectus is prepared, because it’s a good chance to see everything going on in the company. “Technically, you could resign if you found something in that process you didn’t like,” she says. “It reduces your risk.”

They also need to understand management and the owners’ reasons for floating, and whether they are in the company for the long haul. Finally, says Pak- Poy, directors should stay in touch with the joint lead managers and head lawyer to get some informal, up- to-date feedback.

Along with wanting to see a quality board, potential investors also want to be satisfied a company has good governance structures and know who is leading the various committees. Where private companies might have had loose structures, as they approach an IPO, they need to establish board committees, reporting structures and investor relations — and appoint a company secretary.

“If a company has a structure that’s not very formal, it invites problems later on, particularly for people who are used to running private companies and don’t have that sense of how to run a public company,” says Pak-Poy.

Directors need to be prepared for a change once their company is public, says Peter Hammond, managing director and owner of early-stage investment firm Exto Partners and a long-time board member of Airtasker. The company needs to assemble a team of executives and a board who can work well together after listing. “The pressure does go up and you’ve got to make sure you’ve got a team that can work really well under that environment and make good decisions,” he says, adding there is a lot more focus on a public company than a private. “The analysts in the market are going to be watching. They’ll have expectations and so you need to be able to manage those expectations and make sure that you hit those expectations.”

The company needs to bring shareholders along with it and effectively communicate to the entire investor base of institutional and retail shareholders, not just a handful of shareholders who might have held the company privately .

Ahead of an IPO, companies should build a profile, particularly if they’re not a retail brand, so that they’re not pitching an unknown business to investors. “It definitely helps to have that familiarity with your business and the business model that you’re taking to market,” says Hammond.

Spenceley notes that correctly timed press coverage can create a “buzz” about an IPO. Airtasker raised its profile with a carefully executed plan. As the investor roadshow got underway in the seven weeks leading up to the float, the team made sure they had news items to release to the press to ensure fund managers would read about the company on the day they were to meet them.

Fung has one more tip for a successful IPO. “I was about to fall into a mistake of just treating it like a regular day,” he says of the day the company listed, adding that a lot of founders consider listing as another step in the journey, not the end of the journey.

“A few people told me before the day, if you’re not going to celebrate at this point in time, when are you ever going to actually recognise what all these other people at Airtasker are doing and working so hard for? So we had a pretty big party on the day of the IPO and gave everybody that chance to celebrate.”

For a brief period after its public float, tech stock Nuix was a market darling. But things didn’t quite go according to plan.

Shares in the intelligence and analytics firm that was used by law enforcement agencies and law firms all around the world rose 63 per cent on debut last December. It was a global software company with a market- leading position in position and the float had solid support from institutional investors. The shares climbed to a peak of $11.85, more than double the $5.31 investors in the IPO had paid. That came to an abrupt end in late February, when the company fell short of the revenue guidance in its prospectus, thanks to a delay in sign-ups and contract renewals on its software platform. Having traded at $9.85 at the start of the month, Nuix shares closed the month at $6.06 and kept falling.

The company said the lower revenue was a result of timing and it would make up for the miss in the second half of the year. But in late April, Nuix said it would miss its prospectus target, and investor belief in the company evaporated. The share price fell further, an example of how investors lose faith in a company that misses its IPO forecasts.

On 31 May, Nuix announced a second downgrade. Since then, ASIC has launched an ongoing investigation into disclosures and accounting in the prospectus. The company is also facing a shareholder class action.

Things haven’t improved for Nuix. In late August it reported a flat full-year for 2021 and a loss of $1.6m, down from the previous year’s $23.6b profit and a long way from the growth company portrayed in the IPO. The company also published pro forma results and results calculated on a constant currency basis, which looked a lot more palatable, but investors weren’t listening. The shares fell more than 11 per cent to $2.55.