Despite the economic damage wrought by Brexit, the pandemic and the war in Ukraine, many Scottish companies are scaling-up their operations and expanding into new territories.
To do so effectively, most have to seek external funding, but after initial seed and start-up rounds, there are decisions to be made for founders in terms of which route is then taken.
Traditionally, the two alternatives have been private and public.
Bosses can either continue to seek ever larger sums from a variety of angel groups, venture capitalists, private equity firms and other institutional investors, or list their business on the stock exchange, selling equity or debt to shareholders via an Initial Public Offering (IPO).
As Insider extensively covers, both options have been taken in recent years by firms in a variety of sectors, with boards and advisers mulling specific advantages and disadvantages to either.
Within the deal-making community though there is still some debate over which is the best way to grow - and which is ultimately preferable for the wider Scottish economy - so we spoke to some of the key stakeholders across investing, advisory and legal to settle the score once and for all.
The benefits of going public
One of the most oft-listed upsides of listing is the increased market profile, should the IPO be well subscribed and live up to valuation expectations.
If this is the case, then entry to the Alternative Investment Market (AIM) or even the main markets of the London Stock Exchange can also significantly increase money raising potential, using this 'paper' to fund acquisition and expansion.
Paddy Graham, head of Scotland at BGF, cites Calnex Solutions and the Artisanal Spirits Company as Scottish businesses in which his firm has stakes, and which have recently listed.
"I knew Calnex from 2010 when I was working at Sigma Capital, they got venture capital money then and ultimately they listed - both sides worked well at different stages - eventually the timing was right, they had decent scale and strong visibility of the growth plan and forward revenues.
"As for Artisanal, there were a multitude of reasons for listing - creating brand visibility, getting liquidity easier - and they’ve done well; it's a solid business that should deliver on the projected numbers."
Telecoms business Calnex listed on the AIM in October 2020, becoming the first Scottish company to do so in more than two years. Valued at £42m, the float achieved gross proceeds of £22.5m, with £6m going to the company and £16.5m shared by selling shareholders.
"The successful fundraise and move onto the public markets provides us with the resources to expand our product portfolio, both organically and through acquisition, to take advantage of the significant structural changes taking place in the global telecoms industry," founder and chief executive Tommy Cook said at the time.
The Artisanal Spirits Company - owners of the Scotch Malt Whisky Society - joined the AIM last summer, making £26m; with £1m invested into spirit stock soon after.
A financial update this March showed that losses after tax came in at £3.4m, including the £900,000 impact of exceptional costs relating to the IPO. However, the group's net debt position improved to £5.2m - from £13.7m in 2020 - as a portion of the proceeds were used to temporarily reduce borrowings and minimise interest costs.
Graham comments: "Timing is key for any listing of course, while the other challenge is the readiness for additional governance and reporting demands."
Two more recent AIM listings demonstrate this point.
Lithium-ion battery manufacturer AMTE Power raised £13.7m last March - nearly twice the £7m it was originally seeking.
The company has since used the proceeds to finance its working capital requirements, prior to income generation from the commercialisation of its battery cells.
At around the same time, ready meal business Parsley Box raised £17m via a share offering ahead of its listing, at a market capitalisation on admission of £83.8m.
However, a year later, the group was only able to raise approximately £140,000 through the open offer announced on 10 March - representing approximately 12.85% of what was hoped for. Together with £5.9m pledged from a placing of shares, the company raised gross proceeds of £6.07m; about £1m short of its target.
A spate of trading updates in-between revealed slowing demand for its products, food supply chain issues and widening pre-tax losses.
Another point in favour of listing is made by Peter Lynch, associate director of corporate finance at Cenkos Securities in Edinburgh, who notes that an IPO offers a mechanism by which any level of employee can have their remuneration package structured to include shares or share options in the company.
"Given that there is ongoing liquidity available, these shares are then easily able to be converted into cash if the employee wishes or can be held for future capital growth as the company progresses - the dual benefit of this is seen by the company, which can also remunerate and incentivise employee with no impact on its cash position.
"Many institutional investors consider the level of alignment between themselves and the management/employees as being a consideration in their investment criteria and see this alignment as positive for the future prospects of the business," he adds.
The downsides of going public
Nevis Capital founding partner Brian Aitken is someone very much in the private money camp, who points out that the increased profile gained by going public has the downside of then requiring regular and detailed scrutiny of company financials as part of the terms of listing.
"Your shareholder base is constantly monitoring your share price, your results and your ‘news feed’ and there is pressure to make decisions to impact your share price in the short term that might not be the best decision for the long term," he states.
"You also need to spend valuable senior management time with institutional and other shareholders who are not adding any real value to the business - and whose agenda is likely to have a very different time preference to that of a good management team."
Activist investors may take a dislike to aspects of the way the company operates, or hedge funds can bet against the business by 'shorting' stock, adding pressure to respond by changing course or increasing dividends.
Brian Moore, corporate partner at Dentons, agrees that for private companies coming to the stock market for the first time, it can mean big adjustments to how the business is managed, with many employing advisers to help meet regulatory requirements.
"However, equally private capital investors will always expect to exercise some level of oversight and control over an investee company – venture capital and private equity investors will rarely just write a cheque and leave the company to get on with spending it."
Murray Jack, partner at Addleshaw Goddard, says some companies seek the kudos of being a listed company for commercial reasons, but he lists potential IPO disadvantages as a lack of certainty on timing and valuation, a costly and lengthy initial process, plus the risk of not achieving the desired liquidity.
"In the last six months there has been a slowdown in the IPO markets around the world, caused by the uncertainty of the conflict in Ukraine and rising commodity prices.
"These factors contributed to the first quarter of 2022 proving to be challenging for IPOs in the UK and more broadly – market conditions can change quickly however and there is always an appetite for the right investment proposal," he concludes.
The benefits of staying private
Profitability is one factor which often weighs heavily on directors’ minds when considering whether to raise capital from private investors, or through an IPO.
Moore thinks there is sometimes a perception that the equity markets can be an uncomfortable place to be for a loss-making company, or one that is taking longer than planned to achieve profitability.
"Given the choice, some directors would rather use private investment to achieve sustainable levels of growth and profitability before considering an IPO, as they believe there is less public scrutiny or pressure by remaining private.
"There is not a one-size-fits-all solution to this," he continues. "There are plenty of Scottish companies which have successfully grown through private funding - Skyscanner being a good example - and others which have scaled through IPO funding - such as FreeAgent."
Moore argues that an IPO tends to be more appropriate for a business once it has reached a certain scale and established a meaningful market position - although that stage differs between businesses and sectors.
"Sometimes timing can be determined by external factors, such as how buoyant the equity markets are and investors’ appetite for new opportunities; or by a particular listed sector being hot.
"Equally however, timing can sometimes be determined by internal factors, such as the company landing a large long-term contract, or even how much time and money the company has available to commit to the process," he adds.
Aitken reckons one of the reasons there haven’t been as many IPOs in Scotland is because the market is well served by private equity.
"There is a perception that being a listed company is better than being private – but why would you want the regulation, hassle, spotlight, cost, if you don’t need it?
"Private equity backers will be more hands on, supportive and normally take a longer term view than a public market, which can be swayed by a bad quarter," he states. "We’ve even seen some of the most high profile public investors, like Baillie Gifford, increasingly looking to invest in private companies, because they recognise the difficulties that short-termism in the public market present."
Private funding can often provide access to cash much more quickly than public markets. Such backing increasingly also comes with access to support and expertise from the firms that take a stake, advising on the best way to take the next step, or build via acquisition.
BGF is a good example of this kind of investor, with Graham stating that while it only takes a minority stake, help is offered with things like appointing sector-specific external board members, from a network of more than 6,000 that it has built up.
"Both avenues require some dilution, but the pros of private side would be the lack of additional scrutiny, easier access to capital and the crucial advice that's on offer," he adds.
Jack also points out that private funding gives deal more certainty.
"Once you have a signed term sheet with a private investor there is a significant chance that the deal will proceed to completion.
"Compare this with an IPO, where there can be much more risk, given the volatility of public markets – in recent years events such as Brexit/Trump/Ukraine have all impacted public market."
In a similar vein, there is likely to be more visibility and certainty on pricing in a private deal than in a public one – with an IPO companies start the process without knowing exactly who investor will be or what the final valuation will look like.
The downsides of staying private
Someone with both feet firmly in the IPO camp is Craig Anderson, the current chair of Circularity Scotland and a former partner at KPMG, who has charted with dismay the gradual disappearance of Scottish-headquartered firms from the stock exchange.
"I worked on about almost a dozen IPOs during my latter years at KPMG, the two standout organisations in Aberdeen were Wood Group and Aberdeen Asset Management, both of which had international growth aspirations.
"So many Scottish financial services and energy firms have sold out now, there’s something lacking in the ambition among many Scottish entrepreneurs - and what we lose is a support infrastructure, with head offices employing corporate financiers, lawyers, accountants - that all come from down south now."
Anderson continues: "I can understand why people sell, it’s bloody hard work leading a public company; but it strikes me as throwing in the towel and it's certainly suboptimal for the wider economy.
"It’s an individual decision, but it’s disappointing, perhaps something in the Scottish psyche – a lack of self belief."
While in opposing camps on this central debate, both Anderson and Aitken agree that there is a problem with how to support companies to scale up to a size where listing is an option – somewhere north of £300m in market capitalisation, according to the latter.
"How do we create a culture where scale, growth and success are seen as a ‘good thing’ - rather than ‘big business’ being a ‘bad thing’ as it doesn’t fit the rhetoric of being ‘fair’," Aitken asks. "The tone is set from the top - our strategy for economic transformation talks about a 'wellbeing' economy - but what does that even mean?
"Building a successful business creates wealth and prosperity for everyone - with jobs, reward and the multiplier effect across wider stakeholders - so we need a culture where success is valued and not seen as 'unfair' if we want to see more IPOs."
One of the most interesting recent cases in the Scottish firm funding conundrum is that of BrewDog, which has grown rapidly over the last 15 years using its pioneering Equity for Punks crowdfunding model.
Private funding was taken on in 2017, with a £213m stake sold to US private equity firm TSG Consumer Partners, but in January this year it was announced that law firm Freshfields had been hired to prepare the business for a listing, potentially valuing the brewery at around £2bn.
In a recent interview with Insider, co-founder and chief executive James Watt reaffirmed his ambition for an IPO, although he said the business was waiting until market conditions have stabilised before filing.
"If you look at the stock markets this year, they're down 20 to 25%," said Watt. "As much as we would like to do an IPO, the market conditions at the moment are just not conducive, but it's something we're committed to do and we continue to get ready."
Recent scandals about Watt's conduct in the top job may have also affected the timing, with Anderson commenting: "All that stuff uncovered in the BBC documentary is not helpful, because one of the things that potential investors will be very interested in is the culture within a business.
"What works for start-ups doesn’t necessarily work at a later stage – you need to have a strong board to deliver scale."
Graham also chipped in: "The BrewDog listing is obviously a high profile one, and in terms of the things that are coming out now, they will be even more visible if the company does go public."
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