Pre IPO Funding
The listed markets remain one of the lowest cost sources of equity a company can find. The valuation multiple companies can obtain through a listed environment are normally far higher than in the private sector. There are however a number of downsides to being listed that mean that it may not be the right time to go to market. The most common is that the company is going through a rapid period of growth and expansion and therefore want to list on the back of the soon to be higher financials and moreover want management to be focused on achieving that growth rather than the very time-consuming IPO process.
Whilst the timing of your IPO can be flexible, your funding requirement often is not. Fortunately for these scenarios there is a specific pool of investors called pre-IPO investors. These investors provide a hybrid instrument called a convertible note. These notes are a debt instrument that automatically convert to shares in the company at a pre-agreed discount to whatever the IPO valuation is.
This has one very large benefit in getting a deal done. It removes the valuation debate from the discussion. Valuation for a private equity raise is the most common sticking point in a transaction.
This has one very large benefit in getting a deal done. It removes the valuation debate from the discussion. Valuation for a private equity raise is the most common sticking point in a transaction. If the Companies view on their own valuation exceeds what the incoming investor thinks is achievable then no deal will be done. Having the conversion linked to a future IPO price means both parties are de-risked:
- Company: It allows you to raise equity at a modest discount to your future IPO price as opposed to your current private company valuation.
- Investor: It means that whatever the IPO price comes in at you will have a parcel of liquidly traded shares that you have obtained at a discount to their opening value.
Pre-IPO investors do however have some fairly strict criteria. Principally the company needs to be credibly on the path to an IPO in the next 6 to 18months. This is important for both parties as the convertible note is first and foremost a debt instrument. If you fail to IPO within the allotted time period, then the investor is not obliged to convert to equity and can request full repayment of their position.
Case Study: GP Clinics
The client was a privately held group of general practitioner doctors clinics who were undertaking an acquisition strategy. The company had reached just over A$16m of EBITDA and were commencing the IPO process. An acquisition opportunity at an attractive valuation (4x EBITDA multiple) surfaced which required a further A$20m of funding. Debt funding was exhausted and the ASX listing advisor recommended that such a material acquisition would need to be bedded down and synergies realised before they went to market. Given they had a clear path to an IPO in the next 12 months, the company was able to obtain a convertible note at a 10% interest rate and a 20% discount to future IPO price. The company listed at a ~8x EBITDA multiple meaning the convertible note funded acquisition was extremely value accretive for the existing shareholders. For the incoming pre-IPO investor they were able to lock in a 30% IRR on their position which was well above their fund target benchmark.
Explore the Neu Capital investor network to view how our specialist pre- IPO funding partners match with your opportunity.
The Neu Capital network of institutional funds span several hundred Family Offices, Private Equity Firms and Large Corporates.