Financing the next lap of growth

THE ringing of the opening bell at a securities exchange celebrates the successful listing of a company and marks the transformation of an enterprise from private to public. Going public is a motivation for many entrepreneurial companies to fund innovation, growth, acquisitions and internationalisation.

For family businesses, it offers them an avenue to raise external capital and enhance corporate governance, while enabling the owners to unlock business value through risk diversification and succession planning.

Going public

A public listing is a significant milestone – one that would have taken months and years of preparation. The vital question for many companies is if an initial public offering (IPO) is suitable for them.

Preparing for an IPO starts with carefully evaluating its pros and cons and the potential use of proceeds.

First and foremost, companies must be clear about its purpose for an IPO to ensure that their business strategy and brand story are aligned. A successful listing can help companies access financing from the public to complete a strategic acquisition, expand into new markets or provide an exit opportunity for private investors.

This access to permanent capital is available beyond the initial fundraising. Post-IPO, companies can continue to raise funds from the public such as through equity bond or public debt offerings as well.  The company’s listed shares also serve as “currency” to finance future acquisitions.

Going public can also improve how customers, suppliers and employees perceive the brand and business.

During the IPO process, companies communicate their brand and business strategies to investors and the broader business community, driving higher visibility and trust with consumers, suppliers and future partners. The potential for an employee stock options programme can also help to attract and retain talent. 

Timing is a key determinant of the valuation and listing price of the company. However, it is challenging for companies to determine if the equity market conditions will be right to support fair valuation when the company is ready to list. IPO conditions can fluctuate. For example, following the record IPO activity seen in 2021, there was a global slowdown in listings in 2022 and 2023. 

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The Q3 2024 EY Global IPO Trend report finds signs of cautious optimism in global IPO markets. Indeed, with interest rates easing and companies gearing up for growth, IPO activities in the region are expected to pick up. While many elements such as macroeconomics are not within the control of companies, those that are prepared for the window of opportunity are better poised to reap the rewards nimbly.

Selecting the right capital market, stock exchange and listing segment is another key decision. This will determine the regulatory requirements that the listed entity must meet. Majority of issuers list on their domestic exchange due to brand familiarity in the market, which likely brings greater investor appreciation for the listing. However, companies may also seek to list away from home to access new markets or tap a broader investor pool for potentially higher valuations.

While the benefits of IPOs are clear, listed companies must be prepared for higher requirements for transparency and disclosure, as well as the demands of periodic reporting.

There is also pressure to manage shareholder expectations and deliver on promises. As a result, some companies may prefer to undertake alternative financing strategies.

Tapping private equity

Private equity (PE) firms, given their substantial financial resources, have emerged as a compelling option. Unlike traditional bank loans, PE investments do not require regular interest payments, easing the financial burden on the business. 

PE firms have evolved over the years to accommodate the needs of various asset classes, be it early-stage ventures, growth businesses, infrastructure and asset-heavy businesses, or those focusing on impact. The tailored pools of capital in private equity enable a more customised solution that is better suited to the needs of the enterprise.

Over the years, PE firms have accumulated substantial dry powder that is ready for deployment, leading to an increase in PE-backed deal activity in 2024. In the third quarter of 2024, PE firms have announced 135 significant deals globally.

PE firms stand out for their ability to acquire and build great businesses even in challenging times. They are skilled at creating rapid value and adapting their plans as circumstances change. Their differentiated approach gives them an edge, and their focus on driving returns enables companies to thrive in a competitive market. 

PE firms also have vast experience working with portfolio companies across sectors. This allows them to impart valuable expertise and strategic guidance to help entrepreneurial businesses scale, improve operational efficiencies and navigate complex market dynamics.

Their extensive networks open doors to new markets, customers and partnerships, further enhancing the business’s growth prospects.

Importantly, PE firms will work with portfolio companies to create or enhance value, as this will enable more favourable exits and potentially higher returns on investments. 

Entrepreneurial companies that do not have the infrastructure and size to tap the public market may find private equity as a suitable option that offers the necessary resources, networks and governance.

Be clear about the motivation

There is no straightforward answer that will address the million-dollar question if a company should go public or stay private. Suffice to say that there is a range of fund-raising options that appeal to different motivations.

Ultimately, investors will always follow a good story. Clarity of the business’ near-term goals and long-term ambition, as well as the owner’s aspirations, is imperative to securing the right capital and growth strategy. 

Chan Yew Kiang is EY Asean IPO leader and Luke Pais is EY Asia-Pacific Private Equity leader.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.